China Evergrande lost as much as $2 billion, or 80% of its market value, on Monday after its shares resumed trading after 17 months. The resumption of trade is a crucial step for the world’s most indebted property firm as it seeks to restructure its offshore debt and avoid a disorderly collapse that could send shockwaves through global markets and spark social unrest. It also sets an important precedent for investors in Chinese developers who face a similar set of issues.
Evergrande was the first primary developer to default on its bonds since new rules were introduced in 2020 that restrict how much property firms can borrow. Its financial crisis has roiled the Chinese real estate sector, with investors fearing a contagion hitting other indebted developers whose debts are tied to China’s ultra-cheap money supply. Beijing has stepped up policy support for the industry to reassure investors, lowering mortgage rates and cutting red tape for developers.
But Evergrande’s troubles have rekindled concerns about the country’s broader economic stability and the ability of the government to control corporate debt risks. Earlier this month, the People’s Bank of China said it would take steps to prevent a collapse of property companies, which account for up to 30% of GDP and employ tens of millions of workers. At a financial forum last week, Chinese Vice Premier Liu He reiterated that economic risks are “controllable.”
The latest blow came as Evergrande’s shares fell more than 9%, and its January 2023 bond dropped almost 30% after traders took profits on the news that the company has been trying to reset its debt terms. The company has a winding-up petition filed against it that it wants to have heard by a Hong Kong court, and trading of its bonds has been suspended in the city.
Investors will be looking for details of how Evergrande plans to restructure its offshore debt, which it says entails swapping some of its existing foreign currency bonds for new securities backed by its shares and those of its subsidiaries. The company has been seeking the support of more than 75% of creditors to approve the plan, which is expected to be formally announced next month.
Evergrande’s stock, suspended in March after it missed a dividend payment, will continue to be under pressure as investors wonder whether the property giant can get its debt problems under control. It is also facing the risk of being delisted by the Hong Kong exchange, which can remove companies not making sufficient progress in restructuring their debt and other obligations. The company has been given until October to meet the requirements to retain its listing. Its Hong Kong-listed debt securities have already been downgraded to junk status by Fitch. The agency’s latest downgrade to ‘CC’ reflects its view that a default by the developer is now likely. Shares in the firm have slumped nearly 75% this year.
