Redemption of foreign bonds and issuance of new bonds
All of Evergrande’s $22.7 billion in foreign debt, including loans and private bonds, is considered defaulted after defaulting on payment obligations late last year. The company said in March that it would unveil a preliminary debt restructuring proposal by the end of July.
Under the proposal, Evergrande seeks to repay foreign creditors principal and interest by rolling them into new bonds, which will then be repaid in installments over seven to 10 years, one of the sources said. Foreign creditors will also be allowed to swap some of their debt for stakes in the developer’s property services unit, Hong Kong-listed Evergrande Property Services Group Ltd, and electric vehicle maker China Evergrande New Energy Vehicle Group. Ltd, the two sources added.
The first source indicated that up to 20% of the offshore debt can be exchanged for shares of these two units. The restructuring proposals, however, are at an early stage and subject to change, the source added.
Both sources declined to be identified as they were not authorized to speak to the media. Evergrande and the Guangdong provincial government did not respond to Reuters request for comment. Investment bank Moelis & Co and law firm Kirkland & Ellis, advisers to a group of Evergrande offshore bondholders, also did not respond.
A fallen giant
Evergrande, once China’s biggest real estate developer, in December set up a risk management committee made up mostly of members from state-owned enterprises, with the Guangdong provincial government leading the restructuring. The company is crumbling under more than $300 billion in bonds and has become the enfant-terrible of the country’s real estate crisis, going from one missed payment deadline to another.
The developer’s woes quickly led to a wave of defaults in China’s property sector, a key pillar of the world’s second-largest economy, rattling investors and leading to a slump in home sales and difficulty for businesses to find financing.
Evergrande also struggled to repay suppliers and complete building projects. While the state intervention has calmed market concerns about a disorderly collapse of the company, investors are still unsure whether they will get their money back.
Huge drop in China Evergrande value since 2020
Bondholders are split
Evergrande, which began discussions with foreign bondholders earlier this year over the restructuring proposal, aims to finalize the plan by July and sign the investor agreements by December, the first source said. “(Evergrande) Chairman Hui Ka Yan hopes bondholders will accept the proposal, as there are not many offshore assets that can be sold immediately to pay off debts,” said the statement. source.
How Evergrande will be able to obtain enough cash to implement the repayment plan is not immediately clear. The company saw contract sales plunge 39% in 2021 from a year earlier.
Two overseas Evergrande bondholders said they were more inclined to choose the debt-for-equity swap option, as they did not have much hope that the developer would be able to to make full cash repayment, even within the promised extended schedule. One of the bondholders said most creditors, especially hedge funds, would rather take a discount for the swap than opt for extended bonds. “Distressed funds…they just want to get out,” the bondholder said, adding that opinions were very divided among the group of creditors and no consensus has yet been reached.
Most of Evergrande’s dollar bonds had fallen below 10 cents on the dollar by Friday morning. After the Reuters report, the bonds traded slightly above 10 cents on the dollar.
“The plan at least lets investors know that the company has found a solution after the bond default, which has prompted some investors to bet at this price,” said James Wong, portfolio manager at GaoTeng Global Asset. Management Ltd.
Shares of Evergrande Property Services and Evergrande New Energy Vehicle, as well as the parent company, have been suspended for about two months. None of them have yet filed their financial results for 2021 because the audit work was not completed. The property management unit has also been under internal investigation since March to determine how banks seized its 13.4 billion yuan in deposits that had been pledged for third-party guarantees.