Evergrande Pledges to Fix Debt After Rare China Rebuke

(Bloomberg) -- China Evergrande Group pledged to fix its debt problems following a rare public rebuke from regulators as the developer struggles to stave off a liquidity crisis.

Evergrande said it will do its best to maintain stable operations, resolve debt risks, and keep stability in housing and financial markets. The People’s Bank of China and the China Banking and Insurance Regulatory Commission earlier told the group to address its debt woes and refrain from spreading “untrue” information. 

The regulators issued the joint statement late Thursday after meeting with the developer’s executives. Evergrande will disclose material events in accordance with laws and regulations and clarify untrue information in a timely way, the company said in a statement.

The rebuke is the clearest sign yet that Chinese authorities are losing patience with Evergrande, which poses a potential systemic risk to the world’s second-largest economy. With more than $300 billion of liabilities, the conglomerate’s fate has broad implications for China’s $50 trillion financial system and the nation’s banks, trusts and millions of homeowners.

“This is a strong warning to the company,” said Chuanyi Zhou, a credit analyst at Lucror Analytics. “We expect an acceleration in asset sales, introducing strategic investors and advancing negotiations with suppliers.”

Analyst views were mixed on what the regulatory statement signaled about Beijing’s willingness to provide financial support to Evergrande via state-owned banks and investors. While some see the developer as too big to fail, market hopes for a government bailout have been fading in recent weeks.

Evergrande is in talks to sell its Hong Kong headquarters building to state-owned Yuexiu Property Co., according to a person familiar with the matter. While nothing is decided, Evergrande has floated a potential price tag of more than $2 billion, the person said, higher than its HK$12.5 billion ($1.6 billion) purchase cost in 2015.

Shares of Evergrande fell 1.6% in Hong Kong on Friday to the lowest level since December 2016. Its 8.75% dollar bond due 2025 rose 3 cents on the dollar to 39.5 cents, according to Bloomberg-compiled data. Its 6.98% local bond due 2023 jumped 7.8% to 69 yuan, erasing the week’s decline.

Evergrande also said its board will hold a meeting Aug. 31 to approve first-half results ended June 30. 

This isn’t the first time regulators have urged the developer to fix its debt problems. At a meeting in Beijing in June, officials at the Financial Stability and Development Committee asked billionaire founder Hui Ka Yan to consider bringing in strategic investors to stabilize the property giant, emphasizing the need to avoid major shocks to the economy, according to a person familiar with the matter.

The Chinese government has so far kept quiet about whether it will provide financial support for Evergrande, leaving investors to guess at its odds of becoming the next casualty of President Xi Jinping’s campaign to rein in moral hazard and tighten the state’s grip on key sectors of the economy.

Shares of Evergrande have lost two thirds of their value this year amid mounting concerns over the financial health of the world’s most indebted developer. The sell-off deepened earlier this week after Hui stepped down as chairman of the conglomerate’s main onshore real estate unit. A capital injection for China Huarong Asset Management Co. announced on Wednesday did little to alleviate investor concern. 

The developer announced at the end of June that it had cut interest-bearing debt by about 20% in the first half to $88 billion. That enabled it to meet one of China’s “three red lines,” a trio of metrics that policy makers have used to encourage the property industry to deleverage.

Evergrande has been selling assets including stakes in units. Its China Evergrande New Energy Vehicle Group Ltd. unit held preliminary talks with Xiaomi Corp. to introduce strategic shareholders, but the companies didn’t go forward with further communications, Evergrande said in response to a media report on the discussions. 

Still, Evergrande’s debt-reduction efforts have failed to convince investors, partly due to concerns that the company is simply shifting obligations to other parts of its balance sheet. The developer’s total liabilities -- which include short-term payables such as commercial bills -- grew to a record 1.95 trillion yuan ($300 billion) last year. Several Evergrande units have fallen behind on commercial bill payments this year.

“China Evergrande might need to dispose of bigger-sized assets to ease market concerns, although piecemeal disposals could buy time,” said Daniel Fan, a credit analyst at Bloomberg Intelligence. “The regulator’s comments on Evergrande might help signal the developer’s intention to sell to potential buyers.” 

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With assistance from Bloomberg