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Property

China Evergrande scraps four-year quest for mainland listing

Property company mum on terms under which investors waived repayment deadline

Evergrande China's deal is likely to soothe the concerns of investors and regulators, as its debt levels are considered large enough to shake the country's financial system. (Photo by Nikki Sun)

HONG KONG -- Fears of a looming liquidity crunch at China Evergrande Group have eased after the indebted property company reached a deal to postpone repayments to investors after it abandoned its four-year pursuit of a backdoor listing of its core operations on the mainland.

Evergrande, China's largest property developer, said in a statement late Sunday that it had agreed to a deal with investors in its Hengda Real Estate unit who could have demanded repayment of 130 billion yuan ($19.7 billion) in convertible debt if the listing was not accomplished by Jan. 31.

Evergrande did not explain the cancellation of the listing plan or the terms under which holders of 94% of the convertible notes had agreed to waive the upcoming deadline. The company though said it had paid back holders of 3 billion yuan of the notes.

"The announcement was in line with market expectations for most, if not all, of the Hengda investors to waive off their redemption rights and stay invested," said Matthew Chow, director at S&P Global Ratings.

"Given Evergrande now need not pay off most of the investors, it won't see any major outflow of liquidity," he said. "The current cash holdings, funds raised from selling shares and plans for more equity raising can mostly be used for other purposes, including paying down other debt now if the company wants to."

The company's Hong Kong-listed shares closed 2.2% higher on Monday, their eighth consecutive day of gains.

The agreements are likely to soothe the concerns of investors and regulators as Evergrande's debt levels are widely considered large enough to send ripples throughout China's $50 trillion financial system, driving worries over cross-defaults on loans from banks and trusts.

However, the company will now have to succeed in its plans to raise equity and boost sales in order to meet the "three red lines," financial metrics that include a 70% debt ceiling and a 100% cap on the ratio of net debt to equity, recently imposed by Chinese regulators on indebted property companies.

Analysts who are speculating why investors agreed to waive off their redemption rights also are concerned that Evergrande may have agreed to a guaranteed return for rolling over the investment.

"The three red lines environment was not a suitable one for listing Hengda and selling shares to the public," said Travis Lundy, an independent analyst who publishes on the Smartkarma research platform.

"The investors, some of them business partners, could all have demanded their money back," he said. "That they didn't tells you that either they were scared that asking for it would create really big problems, or they got some comfort that at the other end of the deleveraging tunnel, a listing is possible in a different way."

Evergrande had planned to list through a reverse merger, announced in 2016, with Shenzhen-listed Shenzhen Special Economic Zone Real Estate & Properties Group. The state-owned company said in a statement in September that it was "working hard" to advance the process but that "the major asset reorganization planned by the company is still uncertain."

While the January deadline has now been eliminated, there still remains the issue of some 70% of Evergrande's $125 billion debt maturing by mid-2022. While the company has announced plans to slash debt levels in half by 2022, it has so far struggled to make progress. Its total debt rose 4% from Dec. 31 to 835.5 billion yuan as of June 30.

Evergrande's cash balance as of June 30 stood at 204.6 billion yuan. The company has been offering discounts of as much 30% on its properties to achieve sales of 800 billion yuan this year. This helped boost sales 22% to 450.6 billion yuan in the first eight months of the year.

The company also is seeking to list more assets on the stock market. It has received approval from the Hong Kong Stock Exchange to spin off its property management unit, which could bring in up to $2 billion, according to people familiar with the situation. Also, the company's Hong Kong-listed electric vehicle unit has announced plans to raise funds through a listing on Shanghai's STAR Market.

The company last month struggled to sell additional shares in Hong Kong as it aimed to shore up its balance sheet. It raised $555 million at a 14.7% discount to its previous closing price, far short of its target of $1.09 billion, with one person involved in the transaction saying demand was "just not there."

The share sale came weeks after a widely circulated social media post of a letter, allegedly from the company, warning of a potential default if the Hengda listing did not proceed. While Evergrande, founded in 1996 by billionaire Xu Jiayin, said the letter was fabricated and defamatory, its onshore bonds were suspended amid heavy selling and its shares slumped to their lowest level since May.

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