Developer China Evergrande’s ‘darkest moment’ will pass, boss tells staff

China’s most indebted property developer is on the brink of failure after years of rapid expansion and aggressive borrowing.

The under-construction Guangzhou Evergrande soccer stadium in Guangzhou, in China’s southern Guangdong province. Picture: AFP

The boss of beleaguered China Evergrande says he expects the developer to emerge soon from what he calls its “darkest moment” and has pledged to deliver the homes it has promised to buyers and other stakeholders.

In a memo to employees on Tuesday, which is the Mid-Autumn Festival and a holiday in mainland China, Evergrande chairman Hui Ka Yan said the company was dealing with unprecedented difficulties and its employees were facing severe challenges.

The 62-year-old founder tried to strike an upbeat tone as he described how Evergrande’s leaders at all levels were working around the clock to resolve the company’s problems, and he thanked staff members and their families for their sacrifices.

Evergrande, China’s most indebted property developer, is on the brink of failure after years of rapid expansion and aggressive borrowing. The 25-year-old company built residential complexes in every Chinese province and pre-sold numerous apartments that it has yet to finish building. Its deepening financial troubles have rattled investors, employees, home buyers and suppliers. And it has begun to spill over into other parts of the Chinese economy.

Prices of Evergrande’s Hong Kong-listed shares have tumbled to multi-year lows and its US dollar bonds recently traded at deeply distressed prices of about 25c in the dollar. Offshore investors are waiting to see if Evergrande makes a coupon payment on one of its dollar bonds this Thursday.

The developer also owes money to contractors, suppliers of building materials and people to whom it sold investment products. Construction on Evergrande projects in many cities has stopped, sparking protests from people who paid for apartments that haven’t been completed.

An onshore unit of China Evergrande Group, however, said Wednesday it would make an interest payment on time this week, as investors wait to see if the debt-ridden conglomerate makes a separate payment due on dollar bonds that it is expected to miss.

The unit, Hengda Real Estate Group, will pay 232 million yuan ($49.5m) of interest on its 5.8 per cent September 2025 onshore yuan-denominated bond on Thursday, the company said in a stock-exchange filing.

Mr Hui, who has kept a low profile in recent months, on Tuesday said he was proud that Evergrande had an “invincible army that is loyal and bears hardship without complaint”.

“I firmly believe that Evergrande people’s spirit of never admitting defeat, and becoming stronger when the going gets tough, is our source of strength in overcoming all difficulties!” he wrote.

Mr Hui added that, through everyone’s hard work, “Ever­grande will surely be able to get out of its darkest moment as soon as possible, and speed up the full resumption of work” on its developments.

Hui Ka Yan, chairman of China Evergrande Group. Picture: Bloomberg

Many market participants believe Evergrande will go through some form of restructuring that will protect the financial interests of home buyers and make the company’s suppliers whole. Evergrande’s stock and bond investors, however, are likely to incur losses. The company had the equivalent of about $US89bn ($123bn) in debt at the end of June, according to its most recent financial statements. Total liabilities, a broader measure that includes items like money owed to suppliers and taxes it will probably have to pay in the future, totalled about $US304bn.

Concerns about the broader Chinese property sector helped spur a global sell-off on Monday, but some of the gloom dissipated on Tuesday, with Hong Kong’s Hang Seng rising 0.5 per cent and S&P 500 futures up 0.8 per cent by late afternoon in Hong Kong.

Another struggling Chinese developer, Guangzhou R&F Properties Co, got something of a reprieve late on Monday when it secured a $US1bn cash injection from its major shareholders.

The company is one of several smaller Chinese developers whose junk-rated debt has also sold off steeply in recent weeks, as investor concerns have mounted about the viability of the sector’s financially weaker players.

Guangzhou R&F said its co-founders, Li Sze Lim and Zhang Li, would provide $HK8bn ($1.4bn) of financing within one to two months, with 30 per cent of the money due on Tuesday. The company said that meant it should have enough liquidity to meet short-term obligations without raising other new funds or selling assets. And it could consider buying back some of its outstanding bonds if it made economic sense.

Guangzhou R&F’s 11.625 per cent dollar bonds due in 2024 jumped late on Monday, according to Tradeweb, rising to more than 61c in the dollar from less than 50c. The company’s Hong Kong-listed shares jumped 12 per cent on Tuesday.

The Wall Street Journal