Chinese property stocks fell on Thursday after the long-delayed release of developer Evergrande’s restructuring plan, highlighting doubts about the company’s prospects of recovery.
Evergrande was at the centre of a crisis in the Chinese property sector after it defaulted in 2021 with liabilities of $300bn, including offshore debt of $22.7bn.
The company on Wednesday released details about restructuring $19.1bn worth of debt, about 84 per cent of its total offshore leverage. The plan allows creditors to swap debt into new notes with a maturity of 10 to 12 years.
Another option is to convert them into new notes with a five- to nine-year maturity or to swap to equity-linked instruments tied to its two Hong Kong-listed units in electric vehicles and property management.
Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital, said “creditors should need substantial inducement” to accept the long-maturity notes, adding the equity tied to its EV arm “may not provide much actual security” as well.
“Evergrande continues to represent a very significant credit risk,” Silvers said. “The announced restructuring also remains silent on any immediate payment to bondholders or any capital injection from chairman Hui Ka Yan.”
The Hang Seng Mainland Properties index, which tracks 10 of the country’s largest developers listed in Hong Kong, fell 0.6 per cent on Thursday. Notable losses included a decline of 0.9 per cent for Country Garden Services, the property management arm of the country’s biggest developer, and a 0.7 per cent fall for China Resources Land.
The detailed restructuring proposal, which is expected to take effect in October, is a significant moment for a sector that was plunged into crisis in 2021 after the Chinese government embarked on a campaign to reduce leverage.
It comes at a time when sluggish growth poses a severe challenge to Chinese policymakers who are trying to revitalise an economy weakened by years of Covid-19 restrictions.
Yan Yuejin, analyst at the E-house China Research and Development Institution in Shanghai, said the plan was a “breakthrough” after 20 months of debt negotiations and could offer a template for other distressed developers.
“The deal will win time for debt disposal and create better conditions for Evergrande to reduce debt and focus on the delivery of houses,” said Yan. “The proposal will reduce the anxiety of creditors about developers’ debt to some extent.”
But Evergrande’s electric vehicle arm said in a separate filing on Thursday that it could be forced to discontinue production if it failed to obtain new funding. It has only produced about 900 vehicles of its long-delayed flagship model and had $9bn in liabilities as of 2021.
In its restructuring proposal, Evergrande said it planned to get investors’ sign-off by the end of March. The company added it hoped the proposal would “incentivise” onshore creditors to reach an agreement on debt. The vast majority of Evergrande’s assets and liabilities are in mainland China.
The developer also released its delayed 2021 financial statement, showing the company still had $276bn of liabilities as of end of 2021, compared with about $300bn earlier that year. It said in the event of a liquidation, offshore creditors would see an estimated recovery rate of about 2 to 9 per cent.
Additional reporting by Cheng Leng and William Langley in Hong Kong