Evergrande’s last-minute payments bring little clarity to investors

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On the outskirts of Beijing, a banker smartly dressed in black pants and a white-collar shirt stands guard outside a residential development in Evergrande as trucks carrying tons of cement pass by.

Construction at Evergrande Royal Peak – one of hundreds of projects in China involving the world’s most indebted real estate developer – was halted in July because a liquidity crunch within the group hampered its ability to pay contractors and developers. suppliers.

But work resumed earlier this month, according to people at the site, even as the group’s plight and expectations of a looming default sparked a global assessment of the health of China’s vast real estate sector, an industry that underpins the country’s larger economic model.

“I am here to see that the work is in progress [and] make sure the workers are not gone, ”said the banker from Shanghai Pudong Development Bank, who declined to give his name. Responsible for monitoring the site on a daily basis, he added that the bank had loaned against the project in June.

Other Evergrande creditors have much less clarity on what exactly is going on at a company that rocked international markets late last month after failing to make a payment on an offshore bond, only to narrowly avoid default by transferring funds last weekend before 30 days. grace period expired.

Another last-minute payment on a separate bond was reportedly made yesterday, with two bondholders telling the Financial Times today that other creditors have confirmed receipt. Evergrande did not immediately respond to a request for comment. Other deadlines are looming in the coming months.

But international markets, where investors invested roughly $ 20 billion in a company with more than $ 300 billion in liabilities in June, remain in the dark about many aspects of the situation, despite advisers complaining there a few weeks from a lack of “meaningful engagement” from the developer.

Evergrande has yet to provide an official disclosure on its bond payments. Last week’s transfer was initially reported in state media and subsequently confirmed by the FT.

Adding to the uncertainty is the Chinese government, which has downplayed Evergrande’s risks without clarifying its role in solving the problem. Yet Beijing is believed to be deeply involved in the fate of the company that has come to embody the Chinese real estate industry’s struggle to deleverage, and which has taken the prepayment from customers for apartments that have yet to be delivered.

“It’s going to be very opaque – no one is going to tell offshore bondholders what the position is in China,” said one person involved in the Evergrande situation, adding that the “black box” nature of the process and the lack of transparency were “absolutely standard” in the country.

In Beijing’s residential development, where cranes sway against the roar of drills, construction is being handled by CRCC, a state-owned railway company. A contractor, who oversees a team of 50 workers, said he returned to work after being told he would be paid through a bond Evergrande gave to the government. “But we haven’t seen any money, they keep delaying,” he said.

He resigned himself to working without being paid until the Spring Festival, a public holiday, next February. “They told us… That the government took responsibility for the project – that it is a people’s project,” he said. “If the government is doing it, you have to keep doing it. work.

Projects like Evergrande Royal Peak are the lifeblood of the business and crucial for investors in China and beyond. If Evergrande can continue to build and sell new homes, it can generate cash to pay off debts. But in late August, the company initially warned markets in its interim results that work on some of its projects had been suspended.

A model of the Evergrande Royal Peak development shows what it should look like when completed © Ryan McMorrow / FT

On Sunday, after paying the last-minute bond, the group said on their WeChat social media account that work on nine projects had resumed. In Hong Kong, work continues on one of its sites, although a prominent sign on the building that previously displayed its name has been hidden. But the overall status of its 778 projects in more than 200 cities is unclear.

“There is little information on the status and progress of Evergrande’s projects,” said Luther Chai, analyst at CreditSights. “Site visits were made difficult with the border restrictions of Covid-19. “

But, Chai suggested, given the number of unfinished projects, “it is in the government’s interest to protect homebuyers first, ensuring that Evergrande prioritizes completion of projects, so to avoid large-scale social unrest ”.

The person involved in the situation said there was speculation that “government officials are taking control of the projects”. Some local authorities took control of customer pre-sale money in September, while in July news of a project shutdown in Shaoyang City seriously shook investor confidence in Evergrande.

For offshore bondholders, which recently included large investors such as BlackRock and UBS, there are uncertainties about any potential claims on the real estate projects at the heart of Evergrande’s business model, even in the event of a formal default, this that many are still waiting for.

The person added that there was a lack of clarity on the use of the money raised in the offshore bond markets and whether after going through Evergrande’s subsidiaries it ended up in the form of debt or equity capital in specific projects on the Chinese mainland.

“Everyone wants to hope that it will just be passed on as debt,” the person said, adding that if the money was used instead for equity financing, it would have a lower claim in any process. restructuring. “I don’t think anyone knows that yet.”

Meanwhile, even with all of the group’s projects completed, other analysts suggest the company’s impending debt repayment schedule will still be difficult to meet without further asset sales.

Evergrande has missed the interest payments but has yet to meet the principal payment on a bond maturing outside of China. He did, however, extend the maturities of a bond issued by a company called Jumbo Fortune Enterprises that he guaranteed, according to media reports. The company did not immediately respond to a request for comment.

“We don’t really have a lot of time,” said Matthew Chow, analyst at S&P, pointing to debts falling due in March and April. “I think the best of times always is. . . depending on whether the company can sell certain assets.

At the end of June, Evergrande had $ 36 billion in loans and $ 91 billion in trade debt owed next year – well over a third of its total liabilities – up from $ 14 billion in cash.

With no official explanation, theories abound as to why Evergrande made the last-minute bond payment last week rather than default and start restructuring talks. The first is that the company is buying time to sell assets abroad to deal with creditors and other claims on land, although an attempt to sell a stake in its real estate services unit has failed. last week.

Another is that its billionaire president Hui Ka Yan is under pressure from the government to avoid default and is even using his own personal resources to do so. According to Hong Kong Land Records, a mortgage was recently secured on a property that Hui purchased through a shell company in 2009.

Back on the outskirts of Beijing, a worker says he’s not worried about the failure of Evergrande because “the government won’t let this happen.”

Nearby, a poster displays an enlarged photo of Hui from a report in the state People’s Daily newspaper. The image shows China’s richest former man in Tiananmen Square, attending the Communist Party’s 100th anniversary in June, with a nervous smile on his face.

Additional reporting by Wang Xueqiao in Shanghai and Joe Rennison in New York

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