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Property

China Evergrande shares and bonds slide amid debt deadline fears

Country's largest developer said to seek state help for restructuring plan

Chairman Xu Jiayin, who has already turned China Evergrande Group into China's largest property developer, has been adding more debt on a quest to also make it the world's biggest producer of electric vehicles.    © Getty Images

HONG KONG -- Shares and bonds of China Evergrande Group, the nation's largest and most indebted property developer, slumped after credit rating agency S&P Global warned of rising financial risks and concerns mounted over a looming cash crunch.

S&P on Friday said it had changed its outlook on the company's rating to negative, citing increasing liquidity pressure on the company over the next six months and likely weaker profit margins.

Evergrande's bonds were suspended from trade in Shanghai after dropping to a record low following the warning. Its shares in Hong Kong fell to their lowest level in four months on Friday, closing down 9.5% at HK$13.78. 

Its offshore dollar bond due next June slid to its lowest price in five months, falling to 88.5 cents to the dollar from 96.8 cents on Wednesday. Shares of other Chinese developers also tumbled in Hong Kong, with top rivals Country Garden Holdings and China Vanke each falling at least 3%.

A widely circulated social media post on Thursday purported to show a letter said to have been written by Evergrande last month to the provincial government of Guangdong in which the company warned of a potential default and a financial crisis if regulators further held up a listing the company has sought on the Shenzhen Stock Exchange for its Hengda Real Estate unit.

While Evergrande called the post fabricated and defamatory, Reuters reported on Friday that the company had indeed asked for government support for a restructuring plan to facilitate the listing.

Evergrande did not reply to Nikkei Asian Review's inquiries about the S&P report and bond trading suspension.

Shares and bonds of Evergrande, which is considered a bellwether for China's leveraged property sector, have been under pressure all year despite plans unveiled by the company to halve its debt over three years.

It set a target to boost sales as part of its plan to cut borrowings by about 150 billion yuan ($22 billion) each year from 2020 to 2022. So far it has fallen short of the pledge. Total debt rose 4% from Dec. 31 to 835.5 billion yuan as of June 30, according to its recent earnings report.

The immediate challenge for the company -- controlled by billionaire Xu Jiayin -- is to secure a listing for Hengda.

In 2017, Evergrande raised 130 billion yuan in borrowings from investors with the promise that the debt could be converted to equity with the listing of Hengda on a mainland exchange within three years, a deadline later extended to January 2021. To move ahead, Evergrande will need to complete a restructuring with a property company listed on Shenzhen's stock exchange and controlled by the Shenzhen municipal government.

Until the listing takes place, the funds raised in 2017 are treated as quasi-debt, creating an extra burden on Evergrande's balance sheet.

S&P said a failure to meet the January deadline would mean that part of the 130 billion yuan would have to be repaid to investors and that could be a "significant" burden.

"Some financial institutional investors aiming for a financial return within a fixed time frame may not extend the listing deadline but choose to redeem their investments," the rating agency said. "According to our sensitivity analysis, under the scenario where half of the investors redeem, Evergrande's liquidity sources will only be able to cover slightly more than 80% of its liquidity uses."

Evergrande's borrowings are widely considered large enough to have knock-on effects throughout China's $40 trillion financial system, with worries over potential cross defaults on loans from banks, trusts and bonds.

While Chinese authorities have in the past supported large businesses in the interests of financial stability, they have changed tack over the past two years to instill financial discipline. They have allowed companies to default on both onshore and offshore bonds and have also seized conglomerates.

Evergrande will need to slow its project acquisitions and prioritize financial discipline because regulators in China are tightening funding conditions for developers, including imposing limits on leverage and liquidity under a policy dubbed the "three red lines," S&P said.

However, S&P also acknowledged that Evergrande is an asset-rich company that is trying to convince investors to give it more time. It rates the company as "B+," a speculative grade. 

Evergrande is already looking at raising funds from a separate listing of its property management business and a secondary listing of iChina Evergrande New Energy Vehicle Group, its loss-making Hong Kong-traded electric vehicle unit, on Shanghai's STAR Market.

The company is also offering deep discounts on its property developments to boost sales. On Thursday it said it received 400 billion yuan of cash from project sales in the first eight months of 2020.

Additional reporting by Nikki Sun.

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