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China debt crunch

Dividend sweet talk fails to charm China Evergrande investors

Analysts speculate shareholders will get stock in EV unit

If China Evergrande distributes a major part of its holdings in Evergrande NEV as a dividend, it can remove the unit's debts from its balance sheet.    © Reuters

HONG KONG -- Investors are fleeing from China Evergrande Group despite surprise talk from the world's most indebted developer about a special dividend this week, as well as louder chatter about asset sales and debt reduction.

It simply has not been enough, though, to quiet worries about whether billionaire Chairman Xu Jiayin's luck may finally be running out.

Just in the last week, a court froze a 132 million yuan ($20.4 million) bank deposit at the request of creditor China Guangfa Bank, sales were halted on Evergrande projects in a city in Hunan Province and several banks in Hong Kong halted issuance of mortgages for company projects there.

The shares ended a volatile week down 25.9% while its bonds also sank to record levels.

Evergrande stock sank another 7.6% Monday in Hong Kong to HK$6.71, a four-year low. After the market closed, S&P Global Ratings cut its scoring of Evergrande two notches to "B-," noting "the recent weakening in Evergrande's funding access is leading to significant risks in its ability to execute its debt reduction plan in an orderly manner."

Given Evergrande's cash woes, some analysts speculate that planned board discussions of a special dividend on Tuesday will center on giving shareholders stock in Hong Kong-listed electric vehicle unit China Evergrande New Vehicle Group.

If it distributes a major part of its holdings in unprofitable Evergrande NEV, the parent company can remove its 72 billion yuan in debts from its own stretched balance sheet, leading CCB International analyst Lung Siufung to say "the worst is likely over" for the property group.

"Evergrande has been extremely levered for a long time and there are worrying signs around their liquidity," said Michel Lowy, chief executive of Hong Kong-based investment manager SC Lowy, which specializes in distressed and high-yield debt. "The situation that Evergrande finds itself in now is either an indication that it has lost Beijing's support and a large restructuring is looming or it still has some of the authorities' backing, but only if it achieves some milestones."

Evergrande is a bellwether for China's leveraged property sector, widely considered large enough to send ripples throughout the nation's $50 trillion financial system. It is closely tracked by regulators, investors and rating agencies concerned about the potential for contagion should the company default on loans from banks and trusts.

After Guangfa Bank's injunction, Evergrande threatened legal action because the lender's loan is not due until next March. On Thursday, the developer said it had settled the case, but provided no details.

The episode indicates "weakening bank channels which should further pressure Evergrande's liquidity," said Iris Chen, a credit analyst for Nomura in Hong Kong. "We are cautious as this court order could lead to a rush of onshore banks and trust companies freezing assets against their loans to Evergrande, which could potentially lead to disorderly liquidity management."

The company has been battling such pressures since early 2020 as it has tried to safely descend from a mountain of liabilities. Despite its claims to be making progress with debt reduction, its outstanding liabilities grew 5.4% to $301 billion last year.

It had only 158.8 billion yuan in cash and cash equivalents at the end of 2020, against 335.5 billion yuan of borrowings due over the following 12 months, according to its latest annual report.

Xu, whose net worth is estimated at $17.6 billion by Forbes and who is known as Hui Ka-yan in Cantonese-speaking Hong Kong, has resorted to selling off stakes in the group's property management business, among others, as well as entire noncore units. Holders of convertible debt have been prevailed upon to hold off pressing their claims, while consumers have been offered deep discounts to boost apartment sales.

While the company claims it is on course to meet its financial targets, under the slogan "high growth, scale control and debt reduction," a close look shows that is swapping one form of debt for another. Trade and other payables, including commercial bills, grew 13.5% to 829.2 billion yuan last year, more than exceeding the reduction in loan and bond debts.

The bills allow Evergrande to receive goods or services from suppliers who agree to take payment at a future date. This financing has become more crucial as banks clamp down on funding the group, though some Evergrande subsidiaries have missed payments on commercial bills too.

The company, which has vowed to bring its finances into compliance with "three red lines" set last year by Beijing to control debt risks, said in March it would slash interest-bearing liabilities to 450 billion yuan by next June from 716.5 billion yuan at the end of 2020.

"Evergrande may still be able to sell assets and pay off debt in the next six to 12 months or they could go into a debt restructuring," said Lowy. "The next few weeks will be interesting and can determine where Evergrande is heading."

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