China’s Evergrande Group issued a dire assessment of its financial health, saying it faces “tremendous” liquidity strains and has hired advisers for what could be one of the country’s largest-ever debt restructurings.
The appraisal was Evergrande’s most downbeat since market confidence in the developer began deteriorating in May, and followed a spate of protests over the past week by angry homebuyers, retail investors and employees demanding that the company make good on its obligations.
Evergrande’s dollar bonds and shares sank as markets priced in a near-certain likelihood of default. The extent of the losses facing investors will depend in part on whether Chinese authorities and state-run banks take steps to limit the fallout. Evergrande has emerged as the biggest test yet of President Xi Jinping’s willingness to let overindebted companies fail as he tries to wring the excesses out of China’s $US54 trillion ($73.4 trillion) financial system.
Without state intervention, the risk is that Evergrande enters a downward spiral. The developer said in its statement on Tuesday that property sales will drop in the normally buoyant month of September because of waning confidence among homebuyers, who often need to give the company large down payments for properties that may take years to complete.
Evergrande said it had made “no material progress” on plans to sell stakes in its electric-car and property services units, adding that the planned disposal of its Hong Kong headquarters hadn’t been completed as expected. Asset sales had been one of the most important pillars of Evergrande’s plan to escape its cash crunch.
Shares of Evergrande fell as much as 10 per cent on Tuesday morning in Hong Kong, and have lost about 80 per cent this year. Its electric-vehicle unit tumbled as much as 20 per cent. Evergrande’s 8.25 per cent dollar bond due 2022 dropped 4.8 cents to 27.7 cents, according to Bloomberg-compiled prices.
The company’s liquidity problems have escalated in recent days after several of its subsidiaries failed to repay wealth management products, a key source of short-term funding for Evergrande and other developers. A backlash against the company’s plan to extend payment deadlines on the products has triggered protests at Evergrande’s Shenzhen headquarters and at other offices across China.
Evergrande, which denied rumours late Monday that it would file for bankruptcy, hired Houlihan Lokey and Admiralty Harbour Capital as joint financial advisers to assess the firm’s capital structure. Houlihan Lokey has one of the largest financial restructuring operations globally, having advised on some 1,400 cases with more than $US3 trillion in debt claims since 1988, according to its website. Its largest case by assets was Lehman Brothers.