China Evergrande Group has become infamous for its unsustainable debt load, the result of runaway development that saddled the company with unfinished and unsold condos, leading it to stiff foreign creditors to the tune of $20 billion (while employees of the company’s EV unit abruptly stopped paying staff and suppliers late last year) when it defaulted late last year.
And so, after months of failing to repay its foreign creditors, lenders have decided to take back what’s owed by force: to wit, Evergrande’s more financially stable property services subsidiary recently discovered that more than $2 billion of its cash had been seized by foreign lenders.
The company made the revelation Tuesday in a filing to the Hong Kong stock exchange, where it said that unnamed foreign lenders had seized more than RMB13.4 billion ($2.1 billion) of the subsidiary’s deposits that were pledged as security for “third party guarantees”. The company didn’t disclose which lenders had seized the money, or offer any additional details.
It also announced that it would unveil a debt-restructuring proposal by the beginning of July, according to a Reuters report (back in January, the company said it was aiming to have a restructuring proposal in place within six months). Of course, the loss of more than $2 billion in cash from its subsidiary’s balance sheet has only hastened the need for a new plan.
Evergrande, which owns more than 50% of the property services subsidiary, said it considers the seizure a “major incident” that could negatively impact the company. It has formed an independent committee to “investigate the pledge guarantees” and assess the implications of the seizure.
The seizure is bad news for bondholders, as Evergrande’s foreign currency bonds in default were already trading at a fraction of their $20 billion face value.
However, one source familiar with the situation told the FT that they suspected the money had actually been seized by a Chinese bank.
One person familiar with the situation suggested the money was likely to have been claimed by a mainland Chinese bank. “I think a western bank would understand they can’t take that money,” the person added.
The company said said it “is actively looking for solutions and communicating with its creditors” and had hired King & Wood Mallesons, a Hong Kong law firm, as a legal adviser.
Evergrande, Evergrande Property Services and China Evergrande New Energy Vehicle Group (Evergrande’s EV subsidiary) said Tuesday that “a large number of additional audit procedures” and the pandemic meant they couldn’t publish its audited annual report by the March 31 deadline, as required by Hong Kong markets. Trading in the firms’ securities has been halted since Monday.
The disaster also threatens to involve at least one “Big Four” firm: PricewaterhouseCoopers has been facing an inquiry by Hong Kong market regulators tied to its work on Evergrande since late last year. The incident has made auditors nervous about their work for Chinese property developers, as other firms – notably Shimao Group and Ronshine China – also said they wouldn’t have their audited financial statements prepared on time.
The question now is will this be the domino the sets off another debt crisis among China’s deeply indebted developers?