Evergrande Drops Further After Hui Steps Down From Key Role
(Bloomberg) -- China Evergrande Group’s shares and bonds slid for a second day after billionaire Hui Ka Yan stepped down as chairman of the company’s onshore real estate unit.
The move spooked investors already concerned about the company’s funding troubles, with the stock falling 0.8% in Hong Kong on Wednesday, taking the year’s decline to 65%. Its 5.9% local bond due 2023 tumbled 26% to 42.4 yuan and was halted for a few minutes before resuming trading at 2:57 p.m., according to statement from the exchange.
Investors are searching for any signs of upheaval at the world’s most indebted developer, which is selling assets to stave off a cash crunch. The Hengda Real Estate Development Co. unit is core to the company’s property business, contributing about 88% of group revenue last year.
Evergrande said the change of chairman at Hengda was normal after it scrapped plans for a backdoor listing of the unit late last year. But the timing did little to dispel speculation that a restructuring could be in the works requiring Hui to relinquish his grip on his empire.
“In a time when Evergrande needs to stabilize market sentiment, Hui’s role change will lead to more investor anxiety,” said Ma Dong, partner of Chinese local private bond fund BG Capital. “Management needs to give the market a good explanation to avoid further selling pressure on its bonds.”
The government has been pushing to curb Evergrande’s borrowing in hopes of putting a stop to the notion that any company can be “too big to fail.” With more than $300 billion of liabilities, Evergrande’s fate has broader implications for China’s $50 trillion financial system and the nation’s banks, trusts and millions of home owners.
“Evergrande’s liquidity problem still remain unsolved; the money from share sales is just a drop in the bucket compared with its outstanding debt,” said Castor Pang, head of research at Core Pacific-Yamaichi International H.K. Ltd. “Even if the central government does intervene, it’s unlikely that banks will become a funding source like in the past.”
Adding to concerns, Evergrande told home buyers on Aug. 9 that it would delay handing over flats at its Emerald Bay Phase 2 project in Hong Kong by a month, the Hong Kong Economic Times reported, citing a company response to inquiries. Evergrande didn’t immediately respond to a request for comment.
Zhao Changlong was named to replace Hui as chairman of Hengda, according to the website of the government-run National Enterprise Credit Information Publicity System, a corporate information platform not typically used for major company announcements. Hui remains chairman of the overall group, which owns 63.5% of Hengda.
Zhao led Hengda before it sought an A-share listing. Hui became the unit’s chairman in November 2017, after Hengda introduced 130 billion yuan ($20 billion) from strategic investors with a clause that he shares repurchasing responsibility should the listing fail. The plan, which involved selling Hengda to a Shenzhen-listed shell company, was aborted last November.
Hui’s departure from Hengda doesn’t necessarily mean he’ll give up his role as group chairman, according to Bloomberg Intelligence analysts Patrick Wong and Lisa Zhou. “China Evergrande Group’s overall business management may not significantly change in the short term,” they wrote Tuesday.
Others have been less optimistic. Analysts at PRC Macro wrote in an Aug. 10 note that they think Evergrande is approaching a debt restructuring that could wipe out its existing shareholders and force significant haircuts on bond holders.
“We remain bearish on Evergrande’s ability to save itself and believe the developer has been abandoned by regulators,” according to the research.
Curbed by China’s “Three Red Lines” that determine whether companies can take on additional debt, Evergrande has been spinning off and selling assets. It’s offered steep discounts and relied on so-called commercial bills as payments for suppliers to cut down on debt.
Evergrande raised about 1 billion yuan by selling part of its stake in regional lender Shengjing Bank Co. to local state-owned enterprises, an exchange filing showed Tuesday.
Evergrande’s woes escalated last year when it faced $19 billion in payments if it failed to meet a promise to achieve the backdoor listing for its main property assets in China by the end of January. That sparked concern about cross defaults in its widely held debt securities, triggering fears of systemic risks.
The company skirted the crisis with the help of wealthy friends and the government. Strategic investors agreed to waive their right to force most of the repayments by the property firm, while the local government of Guangdong stepped in to help stabilize the situation, people familiar with the matter said at the time.
Trouble began brewing again this year as Evergrande shrank its borrowings in line with demands from policy makers, while delaying payments to some suppliers who started to take their disputes over IOUs public. Some sought asset freezes. Evergrande’s bonds were also repeatedly downgraded by ratings agencies.
Guangdong has once again been called on to help, with the central government telling authorities in the province to map out a plan to manage the developer’s debt, people familiar with the matter said last week.
“Investors aren’t seeing clear signs of a rebound or positive trends,” said Pang. The company “could rely on selling land or undeveloped projects, but it will curb growth for the company.”
©2021 Bloomberg L.P.