Evergrande Deal Misses Target After Founder Cut Out Friends
Evergrande Raises $555 Million in Reduced Placement to Pay Debt
(Bloomberg) -- China Evergrande Group broke with precedent this week by excluding friends of billionaire founder Hui Ka Yan from a closely watched share sale, a strategy that was designed to bolster investor confidence in the embattled developer but may have instead had the opposite effect.
Evergrande left Hui’s frequent associates out of the deal as it sought to raise as much as $1.09 billion, according to people familiar with the matter. The company wanted to prove it could access long-term funding without relying on other Chinese property tycoons, one of the people said.
While Evergrande did entice several big-name buyers including Norway’s sovereign wealth fund, the share sale ended up raising about half the targeted amount and was priced at a steep discount to the previous close. Evergrande’s stock slumped 17% in Hong Kong Wednesday, the biggest decline in more than five years. Shares rose 0.6% Thursday, to HK$16.16.
Its offshore bonds fell by as much as 5 cents on the dollar, with some analysts interpreting the downsized offering as a sign of weak investor demand.
The negative market reaction adds pressure on the world’s most indebted developer to raise more money in other ways, including business unit spin-offs and increased condominium sales in China. While the company isn’t facing an immediate liquidity crisis, its $120 billion mountain of debt remains a concern for investors and Chinese regulators.
“The share placement flop shows that Evergrande’s extensive liabilities remain an overhang,” said Castor Pang, head of research at Core Pacific-Yamaichi Intl HK.
Evergrande said it couldn’t immediately respond to a request for comment.
Among the developer’s near-term liabilities are about 10.6 billion yuan ($1.6 billion) of domestic bonds maturing Friday, Bloomberg-compiled data show. Evergrande raised 2.1 billion yuan after pricing a five-year note Wednesday and previously sold a 4 billion yuan bond in September, just before reports of a potential credit crunch emerged. Evergrande secured relatively cheap borrowing costs at 5.8% for both, the second-lowest coupon among its outstanding yuan bonds, the data show. It’s unclear who bought the notes.
Hui has counted on other tycoons to raise money in the past, tapping his financial ties with real estate empires run by three Chinese magnates. Known locally as the “Big Two Club” because of their fondness for a Chinese poker game of the same name, the group includes Chinese Estates Holdings Ltd.’s Joseph Lau, New World Development Co. billionaire Henry Cheng and C C Land Holdings Ltd.’s Cheung Chung Kiu.
When Evergrande sold $6 billion of bonds in January -- just as parts of China’s economy were preparing for a coronavirus lockdown -- Lau and his family bought $1 billion, Hong Kong’s Sing Tao Daily newspaper reported, without citing a source. The purchases were part of at least $16 billion of transactions among Big Two Club members tracked by Bloomberg over the past decade, a tally that includes everything from stock investments to property contracts.
Evergrande’s liquidity challenges surged to the fore last month after reports that the company sent a letter to the provincial government of Guangdong warning that payments coming due in January could cause a cash crunch and potentially lead to cross defaults in the broader financial sector. News of the plea for help sent Evergrande’s stock and bonds tumbling even as the company dismissed the concerns as based on rumors and “fabricated” documents.
Evergrande sealed a deal on Sept. 29 with a group of investors that waived their right to about $13 billion of repayments in January, but there are still some holdouts. The company’s largest strategic investor is leaning toward demanding repayment of $3.4 billion, Bloomberg reported Wednesday, citing people familiar with the matter.
Investors linked to Shandong Hi-Speed Group, a state-owned conglomerate based in northeastern Jinan, can demand payment if Evergrande fails to get a long-delayed backdoor listing of its main real estate assets in China by Jan. 31. Negotiations to waive those rights are ongoing, though Shandong Hi-Speed is keen to recoup the money, the people said, asking not to be identified discussing private deliberations. A final decision hasn’t been made.
The provincial State-owned Assets Supervision and Administration Commission, an arm of the State Council with oversight of Shandong Hi-Speed, has balked at a deal, concerned over possible losses, one of the people said. Any agreement would require its approval.
Evergrande is in talks with Shandong Hi-Speed about turning the investment into common equity and expects an outcome in the near term, the developer said in response to questions from Bloomberg News. The junk-rated company’s proposals have also included the repayment of a portion of the investment, one of the people said.
Shandong Hi-Speed is one of the few state-owned strategic investors in Evergrande. With total assets of 730 billion yuan, the conglomerate is the biggest company by assets in the province of Shandong and oversees sprawling businesses across road, hi-speed railway, banking and investments, according to its website.
Active Talks
Shandong Hi-Speed Group couldn’t immediately comment. Representatives at their listed company Shandong Hi-Speed Co. said the company is paying close attention to the situation and would maintain active communication with related companies.
Evergrande raised about HK$4.3 billion ($555 million) from its top-up placement on Tuesday. The deal’s nearly 15% discount was wider than those offered by rival developers in placements this year: Sunac China Holdings Ltd. sold $1 billion of shares at a discount of 8.3%, while China Vanke Co. offered a discount of 4.8%.
Evergrande still has multiple avenues to raise cash. It’s sitting on one of the biggest portfolios of undeveloped land in China and has been cutting prices for new homes to ramp up sales.
The company is also planning to tap the soaring demand for property management companies by spinning off its services business via a listing on the Hong Kong stock exchange. The initial public offering could raise as much as 30 billion yuan by year end, according to analysts at HSBC Holdings Plc.
Hui also has aspirations to take on Elon Musk in the electric vehicle business, through China Evergrande New Energy Vehicle Group Ltd. The auto unit plans to list shares in Shanghai. That stock sale could raise 34 billion yuan, according to HSBC.
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