(Bloomberg) -- The crisis at China Evergrande Group continued Monday after the company’s mainland unit said it failed to repay an onshore bond, adding a new layer of uncertainty to the developer’s future as a restructuring plan with its offshore creditors teeters.
The builder at the center of China’s property developer crisis said its Hengda Real Estate Group Co. subsidiary defaulted on 4 billion yuan ($547 million) in principal plus interest due Sept. 25. In March, Hengda missed an interest payment on the 5.8% yuan bond issued in 2020, and said it would “actively” negotiate with bondholders to find a solution, a promise it reiterated in Monday’s statement.
Evergrande is running out of time to get what would be one of the nation’s biggest-ever restructurings back on track after setbacks in recent days have raised the risk of a potential liquidation. The company has scrapped key creditor meetings at the last minute, saying it must revisit its restructuring plan, faced the detention of money management unit staff, and been unable to meet regulator qualifications to issue new bonds.
That last item is a major blow to its planned restructuring of at least $30 billion of offshore debt that would have creditors swap defaulted notes for new securities. Evergrande’s shares plunged as much as 25% Monday.
Meanwhile, Caixin reported Monday that Xia Haijun, an ex-chief executive officer of Evergrande, and Pan Darong, a former chief financial officer, have been detained by Chinese authorities.
As the poster child for China’s property crisis, Evergrande is under pressure to finalize a blueprint for its offshore debt restructuring as it grapples with an even bigger pile of total liabilities that amount to 2.39 trillion yuan — among the biggest of any property firm in the world. With the company faces an Oct. 30 hearing at a Hong Kong court on a winding-up petition, which could potentially force it into liquidation, the clock is ticking.
The distressed real estate giant said late Sunday it couldn’t satisfy requirements of the China Securities Regulatory Commission and the National Development and Reform Commission to issue new notes. It cited an investigation of Hengda, without elaborating. The unit said in August that the CSRC had built a case against it relating to suspected information disclosure violations.
The latest signs of trouble at Evergrande caused simmering worries about China’s deepening property crisis to flare. A gauge of Chinese property stocks tumbled the most in nine months on Monday, taking its loss in valuation this year to $55 billion. China Aoyuan Group Ltd. slumped by a record after its shares resumed trading, and property investing firm China Oceanwide Holdings Ltd. faced court-ordered liquidation after a Bermuda court issued a winding-up order.
Evergrande, whose default in late 2021 opened the door to record debt failures by developers, late Friday canceled key creditor meetings that had been set for early this week and said it must reassess its proposed restructuring. It cited sales that have “not been as expected.”
“A huge amount of work has gone into the planning and formulation of Evergrande’s restructuring plans, but if the sales forecasts underpinning the turnaround now appear unachievable, it is better to revisit the deal terms before scheme meetings are held,” said Jonathan Leitch, a partner specialized in debt restructuring at law firm Hogan Lovells in Hong Kong.
Creditors could expect a “downward revision” in terms and the repayment periods may be further stretched out, according to Leitch. The delay “creates more uncertainty and will further test the patience of bondholders.”
The developments follow news just about a week ago that authorities detained some staff of Evergrande’s money management business, a sign that its saga has entered a new phase involving the criminal justice system. The setbacks also come as strains mount among other major developers including Country Garden Holdings Co., which shocked China’s financial markets last month by missing initial deadlines to pay dollar bond interest.
The worsening industry crisis has fueled concerns among some global money managers that Chinese assets are becoming ‘uninvestable,’ amid weak governance and disclosure practices. China’s offshore junk bonds, most of which were issued by builders and which were once once of the world’s most lucrative fixed-income trades, have lost more than $127 billion in value since peaking just two and a half years ago.
Evergrande didn’t explain what reassessing debt terms would mean for creditors who have already endorsed the existing restructuring plan, nor did it detail the level of support for its current plan.
The difficulty in issuing new notes for the developer could drastically change the design of the firm’s restructuring, and what creditors’ recovery may look like. In an early proposal published in March, Evergrande provided an option for creditors to receive new notes maturing in 10 to 12 years. Or, they could choose a combination of equity-linked securities.
But after the latest news, converting all debt to shares of Evergrande or of its arms remains “the only option for debt restructuring,” wrote UOB Kay Hian analysts including Liu Jieqi in a note. Even this solution “faces great uncertainties,” they said.
When Evergrande updated the market on progress on its restructuring plan in April, investors identified as “Class C” creditors with about $15 billion of claims emerged as a group that hadn’t given sufficient support. Those holding more than 30% of Class C debt had endorsed the restructuring proposal, far below the 75% needed from each creditor class to implement it through what’s known as a scheme of arrangement.
Another group under China Evergrande Group’s scheme, known as Class A creditors, and accounting for $17 billion of claims, already delivered a support level of over 77% as of the April filing.
Evergrande didn’t provide a new schedule for the meetings, only saying it would make further announcements when there is an update.
Several Chinese developers are contending with similar winding-up lawsuits from foreign stakeholders frustrated by what they see as the slow pace of restructuring talks. Such petitions can potentially force a court-ordered liquidation.
Evergrande had previously postponed creditor meetings that were scheduled to begin Aug. 28. At that time it had cited a desire to let creditors “consider, understand and evaluate” the terms of the schemes and give them more time to consider recent developments, including a share trading resumption.
Earlier this month the company also revised dates of the scheme sanction hearings to October.
--With assistance from John Cheng, Claire Boston and Jacob Gu.
(Adds news of skipped yuan bond payment in first and second paragraphs, ex-CEO detention in fifth paragraph.)
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