As Evergrande trims offshore debt and rebuilds investor confidence, SMEs and banks are overlooked in payment queue

developer, special dividend payout, “three red lines” deleveraging campaign

China Evergrande’s creditors face uncertain times ahead. The world’s most-indebted developer has to navigate through choppy waters, including political concerns, before it can steady itself after a huge beating in stock and bond markets over the past five months.

Billionaire chairman Hui Ka-yan has taken efforts to reduce debt and shore up market confidence after it came in Beijing’s cross hairs for its massive borrowings and was prevented from getting new loans in the second half last year.

Some of the measures included early redemption of purchase offshore bonds and deep discounts on home sales to boost its cash flow. A special dividend payout to shareholders, audacious at a time of crisis, has since been scrapped.

The Shenzhen-based developer has seen its debt fall to nearly 570 billion yuan (US$87.7 billion) from a peak of 870 billion yuan in 2020. Its net debt-to-equity ratio has dropped below 100 per cent, in line with one of the central bank’s “three red lines” deleveraging campaign. Still, there are concerns it may have put local banks and small suppliers at the back of the queue among creditors.

developer, special dividend payout, “three red lines” deleveraging campaign

“The situation has not turned brighter even after it met [one of] the three red lines,” said Zhou Chuanyi, a credit analyst at Lucror Analytics in Singapore. “Cutting debt is a step in the right direction, but we are not sure whether the government will prioritise which debts it would like the company to repay.”

Evergrande’s shares have plunged by some 75 per cent in Hong Kong over the past 12 months, while its foreign-currency bonds due in 2022 and 2025 have skidded to new lows.

The three red lines, unveiled last August, limit borrowings by defining thresholds on liability-to-asset ratio at 70 per cent, net debt-to-equity ratio of 100 per cent, and cash-to-short-term debt multiple of one time. Evergrande was the only developer among top-10 peers in breach of all ratios.

While it is not clear what message the officials at the Financial Stability and Development Committee delivered to Hui at a meeting in Beijing, just before the billionaire appeared at the Communist Party’s 100th anniversary celebration on July 1. Analysts said the authorities would like Evergrande to resolve its debt situation without setting off systemic risks and social instability.

developer, special dividend payout, “three red lines” deleveraging campaign

Chairman Hui Ka-yan in an April 2020 file picture. Photo: Handout

“The government cares more about the loans owed to banks, the money it has not paid the big and small suppliers and the homes sold but not delivered to the individuals,” said Tommy Wu, senior economist at Oxford Economics. “If these borrowings turn bad, it will affect the financial system and real economy. But when there is a limited pool of money, the government would like to see them [banks and suppliers] get paid first.”

Reports of banks rejecting commercial acceptance bills (CABs), or IOU notes issued by Evergrande to its suppliers, have gone viral on Chinese social media this year.

One contractor told the Post that CABs totalling 6 million yuan had matured without getting paid. The developer has been making excuses and has delayed the payment for months, said the business owner, who only gave his family name Lin.

“This money is extremely important for the survival of my company,” he added. “If Evergrande delays by another couple of months, my company will have to shut down and all my employees would be without jobs.”

Lin, who runs a painting and heat-insulation business in Nantong, Jiangsu province, is working on six Evergrande projects in the Yangtze River Delta region, accounting for half of his turnover.

Evergrande had a “small amount of CABs overdue and had arranged for repayment in June, a spokesperson said. The company declined to comment when asked by the Post last week on whether more CABs were rejected or unpaid in July.

“Most of its upstream and downstream suppliers are small and medium-sized enterprises that the central government has emphasised to protect and support,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management. “Leaving SMEs struggling and dying, while paying its capital-market or boosting equity market morale, is definitely not what the government would like to see.”

The issue of supporting SMEs assumes added significance after Chinese Premier Li Keqiang and other leaders emphasised at a meeting in May they would increase support for small businesses as many were under huge pressure due to record high commodity prices.

“If some regulators came out and said what the company has done is impressive, it would be a real boost,” said Raymond Cheng, a property analyst at CGS-CIMB Securities, who downgraded the stock to hold from add on April 1.

“Investors would only temper their concerns when Evergrande takes actual meaningful and feasible actions, [such as] the disposal of some of assets, so that it can have a better access to bank financing,” Cheng added.


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