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One of China’s largest-ever debt restructurings is looming, with the Communist Party now in the driver’s seat, after China Evergrande Group was formally declared to be in default. While the state’s intervention has quelled fears of a disorderly collapse that would jolt the world economy, investors who hold bonds of the world’s most indebted property developer are wondering how much of their money they’ll see after the dust settles. Meanwhile, Evergrande is under pressure to deliver thousands of pre-sold housing projects — and pay its workers — to avoid sparking social unrest.

1. How did we get here? 

Evergrande, founded in 1996, grew through massive borrowing. Back in 2010, it sold what was at the time the biggest high-yield dollar bond among Chinese builders at $750 million. The firm subsequently embarked on even more of a debt binge to fuel growth, becoming the largest dollar-debt borrower among peers and for a time the country’s biggest developer by contracted sales. It owns more than 1,300 projects in 280 cities, according to the company’s website. Following a liquidity scare in 2020, Evergrande outlined a plan to roughly halve its $100 billion debt pile by mid-2023. But China’s housing market started slowing down amid regulatory curbs. Another liquidity scare sent the company’s stock and bonds tumbling, and after having made late payments on some dollar bonds it missed a deadline in December to pay two dollar-bond coupons before grace periods ended. The board announced the establishment of a “risk management committee” dominated by provincial officials. A preliminary restructuring plan is expected by the end of July.

2. Might the government still bail out Evergrande?

The prospect was long seen as unlikely and faded further when People’s Bank of China Governor Yi Gang said the company would be dealt with in a market-oriented way. A full bailout would tacitly condone the type of reckless borrowing that landed one-time high-flyers like Anbang Group Holdings Co. and HNA Group Co. in trouble as well. Ending moral hazard — a tolerance in business for risky bets in the belief that the state will always bail you out — would also make the overall financial system more resilient. On the other hand, allowing a behemoth like Evergrande to collapse would cause pain for many other companies as well as would-be homeowners. The company has been rushing to complete projects, and was told by Chinese regulators to prioritize payments to migrant workers and suppliers. On a broader level, China set up a financial stability fund in 2022 as part of continuing efforts to reduce systemic risks. It raised 64.6 billion yuan ($9.6 billion) in a first round of fundraising.

3. How much bargaining power do bondholders have?

Not much. Evergrande said in late 2021 that its risk-management committee would actively engage with creditors. Some offshore noteholders see little use in pressing their case in Chinese courts given the government’s heavy involvement in the overhaul. This being a cross-border restructuring with debt-issuing units in multiple jurisdictions creates another challenge for bondholders trying to get organized and show a united front. Still, some offshore creditors have been consulting with financial and legal advisers. 

4. How bad are Evergrande’s finances?

Its annual property sales fell for the first time in at least a decade last year, plummeting 39% from 2020’s level as sales were frozen for months before resuming in April 2022. Meanwhile, it had some 1.97 trillion yuan in liabilities as of June 30, 2021 — the most among its peers in China and the latest figures from Evergrande. Almost half of that amount was bills to suppliers and other payables, while interest-bearing debt totaled 572 billion yuan, down 20% from the end of 2020. The company had also reduced its net debt-to-equity ratio to below 100%, meeting one of the government’s “three red lines” — metrics imposed to limit borrowing by real estate companies. Evergrande has $19.2 billion in offshore dollar bonds outstanding, the most among Chinese developers. Another risk is the firm’s guarantees on related-party debts, including private-placement bonds with limited disclosure.

5. How are other developers doing?

The industry is in a deep slump. Combined contracted sales at the top 100 developers were halved year-over-year in the first half of 2022. Property loan growth slowed to the weakest pace in over two decades at the end of March. Yields on Chinese junk dollar bonds remain above 20% as defaults this year have already set an annual record. Many have had to seek extensions on both onshore and offshore debt in order to avoid potential missed payments.

6. Is Evergrande well-connected?

When President Xi Jinping marked the centenary of the Communist Party’s founding with a speech proclaiming his nation’s unstoppable rise, there overlooking the festivities in Tiananmen Square was Evergrande founder Hui Ka Yan. Born into poverty, the son of a wood cutter, Hui has been a party member for 35 years and has invested in areas endorsed by the top leadership, such as electric vehicles and traditional Chinese medicine. He’s a prominent philanthropist, although his net worth has taken a beating, and Evergrande’s purchase of local soccer team Guangzhou F.C. indicates he shares Xi’s passion for the sport. In the end, those political ties were not enough to avert a default. Hui was said to have requested personal leave from the Chinese People’s Political Consultative Conference in March as Evergrande worked to defuse operational risks. 

More stories like this are available on bloomberg.com



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