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China Evergrande shares tumble 17% after stock sale falls short

Private placement proceeds reach only half of developer's $1.1bn target

A person involved in China Evergrande Group's private stock sale on Tuesday said, “To call it a struggle to sell the shares is an understatement.”   © Reuters

HONG KONG -- Shares of China Evergrande Group, Asia's largest private-sector debtor, slumped on Wednesday after the company revealed it had sold only half as much stock as it had sought to during a private sale on Tuesday evening.

"The share sale illustrated [that] Evergrande is starting to lose backers," said Warut Promboon, managing partner of Hong Kong-based research company Bondcritic. "Default risk just got higher. Whether it actually defaults depends on the level of government and local bank backing, which has kept the company afloat over the past few years."

China's largest property developer said that it had sold shares worth $555 million at HK$16.33, a 14.7% discount to its previous closing price. This was far short of its target of $1.09 billion, with one person involved in the transaction saying demand was "just not there."

"To call it a struggle to sell the shares is an understatement," said another person involved in the transaction. "The steep discount wasn't enough to lure the traditional buyers of the stock, who are now uncomfortable with the climbing leverage of the group."

Evergrande shares fell 17% on the Hong Kong Stock Exchange on Wednesday to close at HK$16.06 following the company's announcement. It was the stock's biggest single-day drop since May 29, 2015, when the share price fell 26.9%.

The share placement flop is the latest in a series of challenges faced by Evergrande, considered a bellwether for China's leveraged property sector. The company has debt of about $125 billion, with nearly half of that due for repayment by next June. Last month, Evergrande saw its debt rating outlook cut to negative from stable by S&P Global Ratings.

The company, which has promised to halve its debt by 2022, has been busy trying to raise cash. Since August, it has raised $3 billion in pre-IPO funding for a property management unit that it plans to spin off and list in Hong Kong and raised about 4 billion Hong Kong dollars ($516 million) for its Hong Kong-listed electric vehicles unit, which is seeking an additional listing on Shanghai's STAR Market.

Evergrande has offered discounts of up to 30% at new developments in pursuit of sales of 800 billion yuan ($118.96 billion) this year. Its sales in the first eight months of the year rose 22% to reach 450.6 billion yuan.

Earlier this week, Evergrande raised 2.1 billion yuan from issuing a five-year bond to domestic investors. Another onshore bond issue last month brought in 4 billion yuan. The company has two onshore bonds maturing on Friday worth a combined 20 billion yuan, data from Capital IQ show.

Last month, Evergrande reached a deal to roll over 86.3 billion yuan of convertible bonds and eliminate a looming January repayment deadline.

Despite the company's long-term plan to slash debt, its half-year earnings report published in August showed it falling short of its target of retiring 150 billion yuan in borrowings a year. Total debt rose 4% from Dec. 31 to 835.5 billion yuan as of June 30.

The share placement, however, "will strengthen the group's financial position," the company said in a statement. Last month, the company said its cash balance as of June 30 stood at 204.6 billion yuan, giving it "abundant working capital."

After Tuesday's share sale, the holdings of Chairman Xu Jiayin, also known as Hui Ka-yan, the Cantonese pronunciation of his name, fell to 70.3% from 71.7%, the company said.

Evergrande's borrowings are widely considered large enough to send ripples throughout China's $40 trillion financial system, driving worries over potential cross defaults on loans from banks and trusts.

While Chinese authorities in the past have supported large businesses in the interest of financial stability, they have changed tack over the past two years to instill financial discipline, standing aside as some companies have defaulted on both onshore and offshore bonds.

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