China Evergrande’s debt drama: Navigating a mega default and the economic fallout

As China’s property giant, Evergrande Group, grapples with a colossal debt restructuring, the global economy watches closely. After a high-profile default, the Chinese government’s intervention averted chaos, but bondholders still face uncertainty. Bloomberg delves into Evergrande’s rise and fall, the intricate restructuring plan, bondholders’ bargaining power, and the reliability of the financial figures. Amid a struggling property sector, broader economic implications loom, and the fate of this behemoth challenges China’s balance between intervention and market dynamics.

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China Evergrande’s Rise, Massive Default and Debt Restructuring

By Bloomberg News

One of China’s largest-ever debt restructurings is starting to take shape. China Evergrande Group was declared to be in default in late 2021, the highest-profile casualty of a broader crisis in the country’s property development industry. The government has stepped in to manage the overhaul, quelling fears of a disorderly collapse that could have jolted the world economy. But Evergrande bondholders are still wondering how much of their money they’ll see after the dust settles. 

Hui Ka Yan

1. How did we get here? 

Evergrande, founded in 1996, relied on heavy borrowing to fuel its growth. It became the largest dollar-debt borrower among its peers and for a time the country’s biggest developer by contracted sales. On its website, it says it owns more than 1,300 projects in 280 cities. Over the years the company also branched out into areas ranging from electric vehicles to a local sports team. It had a liquidity scare in 2020, and outlined a plan to roughly halve its $100 billion debt pile by mid-2023. But China’s housing market began to slow as regulators cracked down on excessive borrowing. Further funding problems sent the company’s stock and bonds tumbling and, after late paymentson some dollar bonds, it missed a December 2021 deadline to pay two dollar-bond coupons. A “risk management committee” dominated by state officials was quickly set up to stave off a complete collapse and guide the firm’s restructuring.

2. What’s the plan? 

A restructuring plan released in March proposes that Evergrande bond investors receive new notes maturing in 10 to 12 years, or a combination of new debt and instruments tied to the shares of its property-services unit, its EV division or the builder itself. Meanwhile, Evergrande prepared fresh information for creditors, including a recovery analysis done by Deloitte, according to Evergrande’s lawyer. He said average recovery for Evergrande notes would be would be 22.5%, versus 3.4% if the firm gets liquidated. 

3. Do bondholders have any bargaining power?

Some overseas investors saw little use in pressing their case in Chinese courts, given the government’s heavy involvement. Early on, a group of them criticized what they called the company’s lack of engagement. However, bondholders secured more influence in June 2022 when a creditor filed a lawsuit to wind-up Evergrande in Hong Kong. That court pressed the company to show concrete proof of progress in the debt negotiations in order to avoid liquidations. Evergrande received court approval to hold votes on its offshore-debt restructuring plan in late August 2023, but then delayed the meetings until late September. Evergrande cited a desire to let creditors evaluate the terms of the proposals as well as the Aug. 28 resumption of trading in its stock following a 17-month halt.

4. How bad are Evergrande’s finances?

Long-delayed results released in July offered a jaw-dropping clue. Evergrande announced $81 billion of combined losses for 2021 and 2022, the company’s first two full-year losses since its 2009 listing. For the first half of 2023, it posted another $4.5 billion loss despite increased revenue. The developer’s debt pile meanwhile stayed high, with total liabilities of 2.39 trillion yuan ($328 billion) as of June. Even as its borrowing only slightly increased to 625 billion yuan as of June, its trade and other payables to parties including suppliers climbed to 1 trillion yuan. The firm’s “severe cash shortage” endangers the completion of its 604 billion yuan of presold homes, and persistent losses are set to deepen its deficiency in equity, according to Bloomberg Intelligence.  

5. Are the figures reliable? 

Prism, a small accounting firm named as Evergrande’s auditor in January, added a disclaimer of opinion to Evergrande’s full-year accounts 2021 and 2022, saying it’s unable to obtain sufficient and appropriate audit evidence. Prism didn’t issue a conclusion on the earnings report for the first half of 2023, citing multiple uncertainties. Still, the results give offshore bondholders something to chew on. 

6. How’s business doing?

Activity on Evergrande’s construction sites appeared to be returning to normal this year. Chairman Hui Ka Yan said in a July internal meeting that some projects were “close to the finish line” for delivery, according to a local media report. Unfinished projects are mainly located in inland cities like Kunming or Guiyang, it said. The developer remains under legal pressure, facing 2,229 lawsuits involving 535 billion yuan related to its mainland property unit as of June. While the stock resumed trading in August, a 79% plunge on its first day back shrank its market value to just about $600 million from a peak of more than $50 billion in 2017. On a brighter note, Evergrande’s contracted-sales ranking has rebounded, to No. 19 as of July out of some 200 companies. It’s unclear, though, how much of that bounce came from sales of discounted properties used to repay overdue loansand wealth-management investment products known as WMPs. 

7. Could the government still bail out Evergrande? 

The prospect was long seen as unlikely and faded further when then-People’s Bank of China Governor Yi Gang said the company would be dealt with in a market-oriented way. A full bailoutcould 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. On the other hand, allowing a behemoth like Evergrande to totally collapse would cause pain for many other companies as well as would-be homeowners. The builder has been told by Chinese regulators to prioritize payments to migrant workers and suppliers. 

8. What about the rest of China’s property sector?

It’s mired in a record slowdown, stifling a recovery this year in the world’s second-largest economy. After a 28% slump in nationwide residential sales in 2022, a rebound early this year faltered by midyear. Home values were falling again across large and small cities, and property investment contracted at a steeper pace in the first seven months. Another major private developer, Country Garden Holdings Co., has moved toward the cusp of a default that could be worse than Evergrande’s. And there are concerns that the crisis is expanding to state-owned developers, more of which are warning of widening losses. Risks are also spreading to the financial sector, where trust companies with massive exposure to real estate missed payments on some investment products. 

9. What has the government done? 

The ruling Communist Party’s top decision-making body, the Politburo, signaled more support for the real estate sector at a mid-year meeting. Its language on property — which accounts for up to 20% of GDP once related sectors are added in — was notably softer than in previous meetings. It also omitted President Xi Jinping’s signature slogan that “houses are for living, not for speculation” for the first time in years. Chinese authorities in August unveiled a further easing of its mortgage policies in major cities, including giving local governments the leeway to scrap a rule that disqualifies people who’ve ever had a mortgage — even if fully repaid — from being considered a first-time homebuyer. 

10. Who is Hui Ka Yan?

When Xi marked the centenary in 2021 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. Born into poverty as the son of a wood cutter, Hui has been a party member for more than three decades and has invested in areas endorsed by the top leadership, such as EVs and traditional Chinese medicine. He’s been a prominent philanthropist — though his net worth has taken a beating — and Evergrande’s purchase of local soccer team Guangzhou F.C. indicates he shared Xi’s passion for the sport. In the end, those political ties weren’t enough to avert a default. Hui was said to have requested personal leave from the Chinese People’s Political Consultative Conference in 2022 as Evergrande worked to defuse operational risks. 

The Reference Shelf

  • The Evergrande company outlook from Bloomberg Intelligence.
  • timeline of the early days of the Evergrande saga.
  • More QuickTakes on how China’s weakening economy, what the three red lines for property firms are and an overview of the property market mess.
  • Bloomberg Opinion’s Shuli Ren asks if there’s another crisis brewing at Dalian Wanda Group Co., China’s biggest shopping mall operator.

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