Last Friday, when we reported that “China Steps In To Ensure Evergrande Funds Used To Complete Housing Project, Not Pay Creditors”, we asked if this was the start of China’s not-so-stealthy rescue of Evergrande.
The answer appears to be yes because as Reuters reports this morning, Beijing is increasingly prodding government-owned firms and state-backed property developers such as China Vanke to purchase some of Evergrande’s assets. Or rather “assets”, because the company has tried and failed to sell all sellable assets before. It is now Beijing’s hope that by forcing SOEs to purchase these underperforming assets, that Evergrande’s liquidity situation is improved at least for the time being.
As we discussed previously, hoping to avoid the optics of yet another full-blown bailout, the central government is unlikely to intervene directly to resolve Evergrande’s crisis in the form of a bailout. Instead, “Beijing hopes that asset purchases will ward off or at least mitigate any social unrest that could occur if Evergrande were to suffer a messy collapse.”
Not surprisingly, what Beijing wants it gets and according to a source, a handful of government-owned enterprises have already done due diligence on assets in the southern Chinese city Guangzhou. In one example, Guangzhou City Construction Investment Group is close to acquiring Evergrande’s Guangzhou FC Soccer stadium and surrounding residential projects.
Set to cost around 12 billion yuan ($1.9 billion), the stadium has been designed to seat more than 100,000, making it the world’s largest venue built for soccer by capacity.
Of course, in keeping with the epic charade that this is not Beijing funneling cash into the broke developer but “third parties”, the potential buyers of Evergrande’s core assets in Guangzhou have been “arranged” with “both political and commercial considerations” in mind, the Reuters source said, adding that authorities don’t want to see just a few companies bidding for the same assets.
Vanke and China Jinmao Holdings are among government-backed property developers that have been asked to purchase assets from Evergrande. China Resources Land has also been asked, one source said. Vanke, which is one-third owned by Shenzhen’s state-owned subway operator, said in August it has talked with Evergrande about cooperating on various projects.
While expectations are high that it will undergo one of the largest-ever restructurings in China, government bodies have been largely silent on the potential for a bailout or how they might deal with a collapse. The reason is simple: Beijing which has been engaged in a years-long deleveraging campaign, does not want to show to the world that even a modest hiccup will force it to go back to square one, and so it is engaging in this elaborate charade where it refuses to let Evergrande fail but will never admit it is indirectly bailing it – if not its shareholders – out.
Indeed, Beijing has worked to curb any downstream effect on the financial system from Evergrande’s troubles, with the central bank pledging on Monday to protect consumers exposed to the housing market and injecting more cash into the banking system.
One of the first signs of an official inquiry into the real estate giant came this week when the Shenzhen government’s financial regulator said an investigation had been opened into an Evergrande wealth management unit. Reuters reported that local governments have been asked to mediate with government-backed groups and companies so they can participate in Evergrande’s reorganization and asset sales.
That said, any action taken by local governments will depend on the extent of Evergrande’s presence in those areas and the local finances of that particular province or city, the sources also said. They added that regulators will first assess the funding situation of all Evergrande’s businesses before taking any action on its liquidity situation.
“What kind of committee should be set up is a second story; it depends on the debt situation,” said one regulatory source.
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Separately, having missed the payment of $83.5 million in interest to offshore bondholders last week, Bloomberg reports that some holders of a bond issued by a company called Jumbo Fortune Enterprises are forming a committee to press their claims in the event of a default because they maintain China Evergrande Group is a guarantor of the debt. The $260 million note from Jumbo Fortune Enterprises matures Oct. 3, according to data compiled by Bloomberg. The dollar note is guaranteed by China Evergrande Group and its unit Tianji Holding. Jumbo Fortune is a joint venture whose owners include Hengda Real Estate, Evergrande’s main onshore unit, according to a local bond prospectus published in April by Hengda.
Notably, unlike last week’s coupon payment which has a 30 day grace period, the effective due date on the bonds is the following day.
The guarantees from Evergrande and Tianji Holding constitute direct, unconditional and unsubordinated obligations and rank on at least on an equal footing with the other unconditional and unsubordinated obligations of the guarantors, according to the people.
Five business days would be allowed if any failure to pay were due to administrative or technical error, though beyond that there would be no grace period, the people said.
This would mean that the deadline is Evergrande’s largest debt test since regulators recently urged the company to avoid defaulting on dollar bonds.