Evergrande Soars After Taming Risks That Alarmed Regulators

(Bloomberg) --

China Evergrande Group's stock and local bonds soared after the developer took a major step toward avoiding a cash crunch that had threatened to roil the nation's $50 trillion financial system and reverberate across global markets.

After a turbulent few days during which banks, bondholders and senior government officials became increasingly alarmed about Evergrande's financial health, the world's most indebted developer said late Tuesday it reached an agreement with a group of strategic investors to avoid repayments that would have placed a sizable strain on the junk-rated company's balance sheet.

Chinese regulators pressed the company to reach a deal ahead of the eight-day national holiday that starts Thursday, according to a person familiar with the matter. Officials were concerned about instability bubbling over in global markets during the holiday, and a potential spill over to China when trading resumes after the break, the person said, asking not to be identified discussing private matters.

The deal buys time for Evergrande to rein in a complex web of liabilities that some analysts have said makes the property behemoth too big to fail. Evergrande owes $88 billion to banks, shadow lenders and individual investors across China and has borrowed $35 billion from bondholders around the world. More than 2 million homebuyers have given the company down payments on yet-to-be-completed properties.

Evergrande shares soared 19% to HK$19.70 in Hong Kong Wednesday, capping a record 43% rally for the shortened holiday week. The stock jumped Monday after the company sought to reassure investors about its finances following a plunge last week.

The local currency bonds also rose, with the 2024 note closing at 88.4 yuan, or 7.8% higher. The 2023 bond jumped 4.9% to 90 yuan, and has rallied from a low of 74 yuan Friday. The dollar debt due 2025 fell 2.3 cents on the dollar to 77.7 cents, Bloomberg-compiled pricing show. Barclays upgraded some of the dollar bonds to overweight, citing the deal.

Services Listing

In another move aimed at shoring up its finances, Evergrande officially filed late Tuesday to spin off its property services business in Hong Kong. The unit had net income of 1.15 billion yuan ($170 million) in the first half of the year, almost three times higher than a year earlier, according to an exchange filing. Huatai Financial and UBS Group AG are among banks managing the sale, which could raise as much as 30 billion yuan, according to HSBC estimates.

Last week's losses came after reports that Evergrande had warned provincial officials of a liquidity squeeze, citing its obligation to return money to some strategic investors if it failed to win approval for a backdoor listing of its main real estate assets in China by Jan. 31. While Evergrande dismissed the reports as based on rumors and “fabricated” documents, the news contributed to a selloff in high-yield bonds across Asia and prompted several Chinese banks to hold emergency meetings to assess their exposure.

“The agreement solves the core issue of Evergrande, which is liquidity concern,” said Raymond Cheng, a property analyst at CGS-CIMB Securities.

Investors holding equity stakes worth about 86.3 billion yuan agreed to keep their shares and not require the company to buy them out. That group represents the majority of the 130 billion yuan in shares held by strategic investors in its Hengda Real Estate unit, who could demand repayment in January under certain conditions.

Evergrande said it's in talks with the remaining investors on similar deals, without identifying any of them. The developer has already finished negotiations with investors holding 15.5 billion yuan of equity interests, who are seeking further approvals. Talks with holders of the remaining 28.2 billion yuan are ongoing. Many of these investors are Evergrande suppliers.

China's cabinet and its financial stability committee, chaired by Vice Premier Liu He, have discussed risks posed by Evergrande without making any decisions on whether to intervene, people familiar with the matter said before Evergrande's announcement.

Read: China Is Said to Mull Ways to Contain Evergrande Risks

Some regulators were considering options to support the developer, such as directing state-owned companies to take stakes in Evergrande or giving the company a green light for its proposed listing of an electric-vehicle unit in China, one of the people said.

China's Financial Stability and Development Committee, part of the State Council, is the top government body overseeing the nation's financial stability. Vice Premier Liu is President Xi Jinping's main economic adviser.

While Evergrande's massive debt pile has made it too risky for some investors, others had been betting Chinese leaders would deem the developer too big to fail. Speculation that authorities will help the company solve any liquidity problems is one reason why its shares and bonds rallied even before Tuesday's announcement.

Even with the investor deal, Evergrande's potential crash crunch remains, said Bloomberg Intelligence analysts Kristy Hung and Patrick Wong.

“Evergrande faces the task of restoring the confidence of buyers and lenders, and still risks liquidity woes despite investors tossing it a financial life jacket,” they wrote.

China's government has a long history of bailing out systemically important companies to maintain financial stability. While policy makers have in recent years sought to instill more market discipline and reduce moral hazard, the economic shock caused by the Covid-19 pandemic has refocused their attention on stability.

©2020 Bloomberg L.P.

With assistance from Bloomberg