(Bloomberg) – China Evergrande Group issued a grim assessment of its financial health, saying it was facing “huge” liquidity squeezes and had hired advisors on what may be the largest debt restructuring in the country of all time.
The valuation was Evergrande’s direst since market confidence in the developer began in May and followed a spate of protests over the past week from angry homebuyers, private investors and employees asking the company to honor its commitments.
Read More: What Is China Evergrande And Why Is It In Trouble?
Evergrande dollar bonds and stocks fell as markets priced in a near-certain probability of default. The magnitude of the losses to investors will depend in part on whether Chinese authorities and state banks take steps to limit the consequences. Evergrande has emerged as the biggest test yet of President Xi Jinping’s willingness to fail over-indebted companies as he tries to squeeze the excesses out of China’s $ 54 trillion financial system.
Without government intervention, there is a risk that Evergrande will enter a downward spiral. The developer said in a statement on Tuesday that in the normally buoyant month of September, home sales will decline due to dwindling confidence from home buyers, who often have to pay the company heavy down payments on properties that can take years to complete.
Evergrande said it had made “no significant progress” in plans to sell stakes in its electric car and real estate services units, adding that the proposed sale of its Hong Kong headquarters had not been completed as expected. The sale of assets was one of the main pillars of Evergrande’s plan to escape the money crisis.
Evergrande’s shares were down as much as 10% on Tuesday morning in Hong Kong and are down about 80% this year. His electric vehicle crashed by up to 20%. Evergrande’s 8.25% dollar bond due in 2022 fell 4.8 cents to 27.7 cents, according to Bloomberg prices.
The company’s liquidity problems have escalated in recent days after several of its subsidiaries failed to repay wealth management products, a major source of short-term finance for Evergrande and other developers. A backlash against the company’s plan to extend payment deadlines for its products has sparked protests at Evergrande’s Shenzhen headquarters and other offices across China.
Evergrande, which denied bankruptcy rumors late Monday, hired Houlihan Lokey and Admiralty Harbor Capital as joint financial advisors to assess the company’s capital structure. Houlihan Lokey has had one of the largest financial restructuring operations in the world since 1988, according to his website, and has advised around 1,400 cases involving more than $ 3 trillion in bad debts since 1988. The biggest case by assets was Lehman Brothers Holdings Inc.
“It looks like they are working on a debt restructuring after no concrete results on the sale of assets and the first task is to stabilize wealth management product owners, which could be a social problem,” said Daniel Fan , Credit Analyst at Bloomberg Intelligence. “It appears that the developer is working on rescheduling pretty much all of the onshore debt, and the next step is to do the same for offshore investors.”
Evergrande has more than $ 300 billion in debt, nearly half of which is debt including to contractors. By December, the group of more than 1.5 million home buyers had received down payments for unfinished properties.
Though Evergrande has no bonds due by 2022, it faces coupon payments of $ 669 million this year, including $ 83.5 million due on September 23 for one dollar bill. Investors are watching the deadline closely given the potential for debt restructuring. Fitch Ratings pointed to an increased chance of default on these interest payments when it lowered the company’s ratings deeper into junk territory last week.
Evergrande said in August it was forced to stop work on some projects because of overdue debt. The company’s billionaire founder Hui Ka Yan promised to complete projects this month and issued what he called what he called a “military contract” to secure the construction and delivery of real estate.
The protests against Evergrande were sparked by his suggestion late last week that long delays in repayments be imposed on the owners of WMPs. While the company tweaked its plan on Monday to mitigate the backlash, private and institutional investors will still face delays unless they accept repayment in the form of Evergrande-developed real estate.
Two units failed to timely fulfill their guarantee obligations for asset management products worth 934 million yuan ($ 145 million), the company said Tuesday, adding that it was in talks with issuers and investors about a repayment agreement.
(Updates on stocks and bonds in the sixth paragraph)
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