Evergrande Gets Loan Payment Demands From Trusts; Bonds Fall

(Bloomberg) -- At least two of China Evergrande Group’s largest non-bank creditors have demanded immediate repayment of some loans, according to people familiar with the matter, adding to liquidity strains at the world’s most indebted developer.

The two creditors are trust companies, which pool money from wealthy individual investors and are a major source of financing for Evergrande and other Chinese developers.

The trusts sent repayment notices to Evergrande over the past two months after becoming concerned about the property giant’s financial health, the people said, asking not to be identified as the details are private. Trust loans often include terms that allow creditors to demand early repayment if certain conditions are met, such as sales targets, ratings downgrades or lawsuits.

One of the trusts has so far received only a small portion of the money owed by Evergrande, one of the people said. The size of the loans involved couldn’t immediately be learned. 

It’s the latest sign that Evergrande is struggling to make good on $305 billion of liabilities to banks, shadow lenders, suppliers and homebuyers. The developer’s bonds have plummeted to levels that suggest investors are bracing for a default, and its three main listed entities have shed more than $110 billion in combined market value since mid-February. While Chinese regulators have urged the company to resolve its debt woes, the government has so far stayed silent on whether it will provide financial support.

Evergrande’s 8.75% dollar bond due 2025 fell 1.8 cents on the dollar to 25.7 cents, according to Bloomberg-compiled data, set for a fresh record low. In the onshore market, where thin liquidity can sometimes lead to outsized price swings, a local bond due 2022 issued by Evergrande’s property unit was halted for a half hour Friday morning after its price fell 23%. The note later finished 5.9% lower. Evergrande shares dropped 4.2% in Hong Kong to the lowest level since July 2015. The developer didn’t immediately respond to a request for comment.

Trusts have been a significant source of funding for Evergrande, accounting for about 40% of borrowings at the end of 2019, the last year the company disclosed the figures. 

While trust lending to developers has slowed in the past year, Evergrande has about 46 billion yuan ($7.1 billion) of such loans maturing in 2021, according to data complied by Yongyi Trust Research. About 11 billion yuan is due in the fourth quarter.

A failure to repay could prompt at least one trust to call back all its loans, a person familiar with the matter said, though it’s unclear how Evergrande would respond. Court cases against the company and its affiliates are being centralized in Guangzhou, a city in Evergrande’s home province of Guangdong, making it more difficult for creditors to freeze assets or pursue repayment through other local courts. 

Evergrande this week warned it risks defaulting on borrowings if its efforts to raise cash fall short. Despite selling stakes in prized assets and offering steep discounts to offload apartments, the developer reported a 29% slide in profit for the first half. Its property and electric-vehicle units posted losses, while some vendors have suspended work on projects due to unpaid bills.

“The group will do its utmost to continue its operations and endeavor to deliver properties to customers as scheduled,” Evergrande said.

The developer has also fallen behind on some smaller shadow loans. A Jinan subsidiary of Evergrande’s Hengda Real Estate unit has missed payment on two leasing loans amounting to 37.7 million yuan, according to people familiar with the matter. The loans were due Aug. 28 and Aug. 31, and the borrower hasn’t provided a repayment plan, the people said.

The recent turmoil has drawn government attention. Beijing instructed authorities in Guangdong to map out a plan to manage the developer’s debt pile, people familiar with the matter said last month. The provincial government is coordinating with banks, other creditors and potential buyers of Evergrande’s assets.

The developer’s main banks met this week to discuss the possibility of setting up a creditor management committee, a person familiar with the matter said, though no decision was reached. At China Fortune Land Development, another debt-laden developer, a creditor committee formed with the support of regulators and local governments is working with the company on a debt resolution plan that would avoid a court-led restructuring.

What Bloomberg Intelligence Says: 

“Its 1.2 trillion yuan worth of projects under development may affect more than 1.6 million home buyers or families, based on a standard 90-square-meter unit at 8,000 yuan a sqm. The government may need to step in if social issues spread out.”

Daniel Fan, analyst

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Bloomberg has reported that several large banks decided against renewing loans to Evergrande that mature this year. Others have agreed to give the developer extensions on some project loans. Banks are treading carefully in part because they risk incurring impairments on their balance sheets if they cut lending too sharply.

Evergrande has pushed back against the idea that banks are denying it loans, saying its borrowing declined after it was able to raise more cash from property sales. Apart from loans, the developer has also borrowed nearly $28 billion from bondholders around the world and received down payments on yet-to-be-completed properties from more than 1.5 million homebuyers.

In an effort to soothe customers, Evergrande pledged on Wednesday to deliver on its housing projects, with billionaire founder Hui Ka Yan describing the directive as a “military order.”

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With assistance from Bloomberg