Evergrande in debt crisis on the way to bankruptcy
Evergrande, the Chinese construction and real estate company in debt crisis, is approaching bankruptcy step by step, with open investigations against it in addition to payment difficulties.
The plan drawn up by the group of companies, one of the largest global investors in the construction sector, to restructure its overdue debts has come to an end due to investigations carried out by regulatory institutions and judicial authorities.
In its notification to the Hong Kong Stock Exchange on September 24, Evergrande stated that the China Securities Regulatory Commission and the National Development and Reform Commission had imposed “administrative measures” on the company’s debt restructuring plan.
The notice said the company could not issue new debt bonds due to “administrative measures” taken in the investigation into its main subsidiary, Hengda Real Estate Group.
Following the announcement, the company’s shares lost 21.8 percent of their value yesterday, raising doubts about whether the group will be able to resolve its debt problems that have lasted for two years.
CHINA HAS A DEBT OF 2 PERCENT OF ITS GDP
Evergrande’s total debt obligation, which reached 2.4 trillion yuan (about $330 billion) at the end of 2022, corresponds to about 2 percent of China’s gross domestic product (GDP).
The company is facing numerous lawsuits filed by creditors over its foreign debt of 12.6 billion yuan ($1.7 billion), which was in default because it could not pay it on time.
The company, whose payment difficulties have worsened due to the current stagnation of the real estate sector in China and the decline in home sales, canceled the six meetings scheduled with creditors on September 25 and 26 to discuss debt restructuring .
The reasons for the cancellations were “weaker than expected sales” and “the need to reassess restructuring conditions.”
If the company cannot reach an agreement with its creditors before the first hearing in Hong Kong on October 30, its assets could begin to be seized for its debts.
THE ASSET MANAGEMENT UNIT IS BEING INVESTIGATED
In its stock exchange notification on August 16, Evergrande announced that its main subsidiary, Hengda Real Estate Group, was being investigated by authorities on suspicion of violating information sharing rules.
The company’s asset management subsidiary, Evergrande Financial Asset Management, is understood to be the center of an extensive criminal investigation into “shadow banking” activities.
The company is alleged to have used proceeds from movable property sold to individual customers to finance housing projects, in breach of regulations.
Police in the city of Shinjin, where the subsidiary is headquartered, reported that “some employees of the company” were detained as part of the investigation on September 18.
While the identities of those detained were not revealed, information leaked to national media claimed that more than 10 people at the executive level, including General Manager Du Liang and Deputy General Manager Yao Bıncai, were being investigated on suspicion of ” illegal fundraising.” .
In 2021, Evergrande did not pay interest to 70,000 clients, including its own employees, on movable assets worth a total of 40 billion yuan ($5.47 billion).
THE FORMER DIRECTORS OF THE GROUP ARE ALSO IN CUSTODY
According to information from the economic and financial news service Caixin, based on “sources with knowledge of the matter”, the former chief executive officer (CEO) of Evergrande, Shia Haycun, and the former financial affairs coordinator (CFO), Pan, are also detained. Darong.
Shia and Pan resigned in July due to the scandal that emerged in 2021, when it emerged that the group had directed bank deposits to its subsidiaries, which it provided as collateral to third parties for loans.
On the other hand, it was reported that Cu Cialin, former manager of the Evergrande group’s insurance company Hayat Teminat, was also arrested on September 17, and was transferred to the state on September 16.
The National Financial Regulation Administration had announced that the newly created state-owned Haigang Life Insurance Company had acquired the subsidiary Evergrande with all its assets and liabilities.
Noting that the subsidiary had “serious debt repayment problems,” authorities stressed that “close supervision and risk resolution are needed.”
HE WAS THE LARGEST INVESTOR IN THE CONSTRUCTION FIELD
Founded by businessman Shu Ciayin in 1996 under the name “Hengda Group” in the southern Chinese city of Guangcou, the company quickly became one of the world’s largest construction and real estate companies with its investments in projects. housing and large-scale urban transformation in major cities. .
The company, which raised $722 million in investments in its public offering on the Hong Kong Stock Exchange in 2009, became the world’s top-grossing company in the construction industry in 2018.
The company, which has carried out more than 1,300 construction projects in more than 280 cities in China, has employed more than 120,000 employees.
The company, which produces approximately 600,000 houses per year, meets a significant portion of China’s housing supply.
The company, whose main activity is construction, has also made investments in different areas, from asset management to the production of electric vehicles, from theme parks to food and beverage brands, and has taken over the operation of Guangzhou FC, one of the most successful football clubs in the country.
THE BEGINNING OF PROBLEMS
The imposition by the Chinese government of limits on interest rates on loans granted by banks and financial institutions to the sector from 2020, in order to avoid unhealthy growth in the construction and real estate sector, is considered the most important factor that triggered Evergrande’s difficulties in paying its debts.
During the years when the country experienced rapid economic growth, the sector, which with its non-core business lines constituted approximately 20 percent of the gross domestic product, was advancing the “big debt-big investment” cycle.
The Covid-19 epidemic, which began in China at the end of 2019, caused serious disruptions in this cycle with a stagnation of housing investments and sales.
Stagnation in the sector suddenly made lending problematic for investors. Furthermore, the Chinese government was concerned both about the risks posed by excessive borrowing in the financial system and the excessive rise in housing prices caused by market speculation.
President Xi Jinping said: “Houses are for living, not for speculation.” Following his words, regulatory bodies decided to impose debt restrictions on real estate companies.
THREE RED LINES
The government introduced a regulation requiring 12 large real estate companies, including Evergrande, to comply with the “three red lines” in order to borrow from state banks.
With the regulation, criteria were introduced for companies according to which the ratio between their total assets and total debts should not be more than 70 percent, net debt should not exceed share capital and cash assets should be greater than or at least equal to those in the short term. debts.
Evergrande was unable to meet any of the debt criteria at that time. The company began to feel the effects of borrowing restrictions the following year, and twice failed to pay interest on two external debt bonds maturing in September 2021.
The fact that a company of this size was struggling with even small foreign interest payments showed that a larger-scale debt crisis was looming.
DEBT MANAGEMENT EFFORTS
Having difficulty finding new debt, the company attempted to cover its debts by selling its assets.
Evergrande announced that on September 29, 2021, it sold its shares in Shining Bank, of which it is a partner, in Liaoning province, to a state-owned asset management company for approximately 10 billion yuan (approximately $1.5 billion).
On the other hand, the company’s attempt to transfer 50.1 percent of its property management unit Evergrande Real Estate Services to Hopson Construction Holding, another Guandong-based construction group, for 20 billion Hong Kong dollars (about 2.5 billion dollars) in October 2021 was unsuccessful. .
The Guangdong provincial government appointed a panel of risk management experts to prevent Evergrande from defaulting on its debts in December 2021.
APPLICATION FOR NATIONAL BANKRUPTCY PROTECTION
The total debt burden of the company, which announced a loss of 476 billion yuan (about 65 billion dollars) in 2021 and 105 billion yuan (about 15.7 billion dollars) in 2022, increased to 2.4 trillion yuan (about 330 billion US dollars) by the end of 2022.
The company, which has defaulted many times this year due to its debts, asked the US courts for bankruptcy protection on August 17.
The petition filed in Manhattan Bankruptcy Court sought protection against creditors who wanted to sue the company or freeze its assets in the US during the restructuring of its debts.
Evergrande shares, which were listed on the Hong Kong Stock Exchange at HK$25.80 per share in July 2020, fell to HK$0.43 yesterday. The company has lost $42.8 billion in market value over the past period.
Analysts assess that in addition to the bad outlook, new obstacles and problems derived from the judicial investigation are bringing the company closer to bankruptcy. (AA)