China considers Evergrande spin-off to stem ownership crisis

This is the end of Evergrande as China's ownership problems spread

A group led by China Cinda Asset Management Co., a state-owned bad debt manager and major Evergrande creditor, would take over any unsold property assets, the people said.

The Chinese authorities are thinking about a proposition to destroy China Evergrande Group by selling the bulk of its resources, as indicated by individuals familiar with the matter. The developer has more than US$300 billion (S$405 billion) of total liabilities, including more than US$19 billion of offshore bonds. The restructuring proposal, submitted to Beijing by authorities in Evergrande’s home region of Guangdong, calls for the developer to sell most resources with the exception of its independently recorded property the management and electric vehicle units, individuals said, asking not to be identified talking about a private matter.

If approved by senior officials in Beijing, the plan would mark the biggest step yet by Xi Jinping’s government to prevent a disorderly collapse of the world’s most indebted developer from roiling China’s financial markets and economy before a closely watched Communist Party leadership transition later this year.

Proceeds from the asset sales would be used to repay creditors, although it remains unclear to what degree banks and bondholders would be forced to accept haircuts on their claims. Senior Chinese regulators have repeatedly said in public remarks that debt risks at Evergrande and other distressed property companies should be dealt with in a “market-oriented way.”

Evergrande’s property management and electric vehicle ventures, with a combined market value of almost $9 billion, would initially be kept intact under the proposal but could be sold at a later date, the people said. A custodian account would be set up for these assets to offer some protection to offshore investors, one of the people said.

If Beijing signs off on the plan, it would kick off an unwinding of the debt-laden developer that was started 25 years ago by billionaire Chairman Hui Ka Yan. It would also likely set off a lengthy battle over who gets paid from what remains.

The size of haircuts ultimately borne by creditors will be closely scrutinized by investors for clues about how Xi plans to balance sometimes competing goals of reducing moral hazard in China’s financial system and maintaining economic stability. The Chinese leader, who’s widely expected to secure a precedent-defying third term this year — and potentially extend his rule even longer — has also been seeking to rein in the billionaire class as part of his “common prosperity” campaign to reduce a yawning wealth gap.

While Xi has surprised many investors with his commitment to curbing financial excesses in the real estate sector, the government has recently dialed back its crackdown amid mounting worries about industrywide contagion. The International Monetary Fund cautioned Tuesday that China’s housing slowdown is among the risks to global economic growth.

Cinda, in response to questions from Bloomberg, said it has “no relevant information to disclose at the moment.” Officials at Evergrande and the Guangdong government didn’t immediately reply to requests for comment. REDD reported on some aspects of the Guangdong proposal last week, saying officials may announce a framework before March 5. Evergrande shares fell 4.5% at 1:29 p.m. in Hong Kong and its dollar bonds were little changed.

The developer said in a statement on Wednesday that it plans to come up with a preliminary restructuring proposal in the next six months. It earlier urged offshore bondholders not to adopt aggressive legal action over repayments, after an ad-hoc group of holders said the company failed to substantively engage with it over restructuring efforts. Evergrande has started the process of identifying bondholders and plans to hire additional financial and legal advisers. The developer was labeled a defaulter for the first time in December after it missed payments on several bonds. Evergrande established a seven-member risk management committee at that time to “actively engage” with creditors.

The panel includes senior managers from Cinda and Guangdong province’s state-owned enterprises. Evergrande has also appointed the chairman of China Cinda (HK) Holdings Co. as a non-executive director. On Wednesday, China Business News reported that regulators held a recent meeting with several asset-management companies to discuss their participation in property developers’ asset disposals. Evergrande’s cash crunch has become a focus for global investors, concerned that a collapse might spark financial contagion and curb growth in the world’s second-largest economy, which depends on the housing market for about a quarter of gross domestic product.

The developer has seen its bonds trade at deep discounts to par as investors brace for what could be one of China’s largest-ever restructurings. Evergrande’s dollar note due in 2025 was indicated at about 16 cents on Thursday. Its stock has plunged almost 90% since the beginning of 2021. While Chinese authorities have eased their real estate crackdown in recent weeks, they’ve made it clear they have no appetite for an Evergrande rescue. The central bank in October blamed the developer’s woes on its “blind expansion and diversification” and failure to operate prudently amid changing market conditions.

Evergrande has made little progress on asset sales in recent months, even after Hui put stakes in once-prized businesses such as a bottled-water unit on the block. The developer in October scrapped talks to offload a controlling stake in its property-management business, which could have raised about $2.6 billion. Plans to sell its Hong Kong headquarters have also stalled. The electric car and services units are now worth more than Evergrande, whose market value has plunged to less than $3 billion. China Evergrande New Energy Vehicle Group Ltd., which has also tumbled over the past year, has yet to mass produce any cars. Evergrande Property Services Group Ltd. manages and services apartments built by Evergrande and other developers.

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