Evergrande pain spreads to wealthy investors as more interest payments missed

The Chinese government, concerned about preserving financial stability, has pushed Evergrande to meet its many obligations. In a recent meeting, regulators urged the company to complete unfinished housing projects and repay retail investors, while averting a default on its dollar bonds.Evergrande’s billionaire chairman Hui Ka Yan meanwhile told staff last week that buyers of its investment products will be repaid, the company said. Yet with more than US$300 billion in liabilities and cash flow shrinking, it is not clear how Hui can pull that off. The company already missed a Sep 23 deadline to make an US$83.5 million coupon payment on a US$2 billion bond maturing in March. The firm is also subject to heightened restrictions on its bank accounts as regulators ensure it uses cash to complete housing projects and not to pay creditors. The stock and bonds are reeling. Evergrande's 8.25 per cent bond due 2022 indicated down 0.5 cent on the dollar on Monday at 28.4 cents, according to Bloomberg-compiled prices. The stock rose 2.5 per cent in Hong Kong, paring its decline to 84 per cent this year. Evergrande’s dependence on trusts and other asset management products began growing after banks were directed to cut back on their lending to the property sector. By the end of 2019, Evergrande had done business with most of the 68 trust companies in China, which accounted for 41 per cent of its total financing, based on the last borrowing disclosure.  In response to Evergrande’s financial troubles, the trust firms grew more cautious last year, with some accepting only one of dozens of proposals from the developer, often funding less than half the project value, the people said.  Trusts are also reducing their exposure to other property firms, a sign that Evergrande’s woes threaten the entire real estate industry, which accounts for more than 15 per cent of China’s economy. The trusts have cut outstanding loans to property firms by 201 billion yuan in the first half of this year, a drop of 17 per cent, according to the trust association. Despite this, trusts remain Evergrande’s biggest source of direct debt, outweighing bank borrowings and bonds, said Christopher Yip, a senior director at S&P Global Ratings. “They are also the biggest trust borrower in the property sector.” When trusts began pulling back, the developer started squeezing money from more murky sources - selling its own high-yield wealth products to staff, homebuyers and others. The money was not raised in Evergrande’s name to side-step regulations and keep borrowings off its books, leaving some analysts to speculate on whether there are hidden obligations that are yet to surface. Evergrande did not shy away from aggressive sales tactics. As the stock and bonds began to crater this year, it sent out a clear directive to employees: Find buyers for the company’s high-yield investment funds or your job could be at risk. Many staff complied, not only buying the products for themselves, but encouraging friends and family to do the same. An employee promotion sent to workers in Liaoning province in July had these investment goals: 100,000 yuan (US$15,000) per employee, up to 10 times that for executives. Managers would be rewarded - or fined - based on meeting the targets, and the purchases would be “important evidence” of performance, according to a memo seen by Bloomberg News.

Evergrande pain spreads to wealthy investors as more interest payments missed

The Chinese government, concerned about preserving financial stability, has pushed Evergrande to meet its many obligations. In a recent meeting, regulators urged the company to complete unfinished housing projects and repay retail investors, while averting a default on its dollar bonds.

Evergrande’s billionaire chairman Hui Ka Yan meanwhile told staff last week that buyers of its investment products will be repaid, the company said.

Yet with more than US$300 billion in liabilities and cash flow shrinking, it is not clear how Hui can pull that off. The company already missed a Sep 23 deadline to make an US$83.5 million coupon payment on a US$2 billion bond maturing in March.

The firm is also subject to heightened restrictions on its bank accounts as regulators ensure it uses cash to complete housing projects and not to pay creditors. The stock and bonds are reeling.

Evergrande's 8.25 per cent bond due 2022 indicated down 0.5 cent on the dollar on Monday at 28.4 cents, according to Bloomberg-compiled prices. The stock rose 2.5 per cent in Hong Kong, paring its decline to 84 per cent this year.

Evergrande’s dependence on trusts and other asset management products began growing after banks were directed to cut back on their lending to the property sector. By the end of 2019, Evergrande had done business with most of the 68 trust companies in China, which accounted for 41 per cent of its total financing, based on the last borrowing disclosure. 

In response to Evergrande’s financial troubles, the trust firms grew more cautious last year, with some accepting only one of dozens of proposals from the developer, often funding less than half the project value, the people said. 

Trusts are also reducing their exposure to other property firms, a sign that Evergrande’s woes threaten the entire real estate industry, which accounts for more than 15 per cent of China’s economy. The trusts have cut outstanding loans to property firms by 201 billion yuan in the first half of this year, a drop of 17 per cent, according to the trust association.

Despite this, trusts remain Evergrande’s biggest source of direct debt, outweighing bank borrowings and bonds, said Christopher Yip, a senior director at S&P Global Ratings. “They are also the biggest trust borrower in the property sector.”

When trusts began pulling back, the developer started squeezing money from more murky sources - selling its own high-yield wealth products to staff, homebuyers and others.

The money was not raised in Evergrande’s name to side-step regulations and keep borrowings off its books, leaving some analysts to speculate on whether there are hidden obligations that are yet to surface.

Evergrande did not shy away from aggressive sales tactics. As the stock and bonds began to crater this year, it sent out a clear directive to employees: Find buyers for the company’s high-yield investment funds or your job could be at risk.
 
Many staff complied, not only buying the products for themselves, but encouraging friends and family to do the same.

An employee promotion sent to workers in Liaoning province in July had these investment goals: 100,000 yuan (US$15,000) per employee, up to 10 times that for executives.

Managers would be rewarded - or fined - based on meeting the targets, and the purchases would be “important evidence” of performance, according to a memo seen by Bloomberg News.