Commentary on Political Economy

Wednesday, 14 October 2020



Evergrande tumbles 17% as share placement falls short

The weak share placement comes as Evergrande is struggling to reduce a debt pile of more than $120bn © Bloomberg

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Shares in China Evergrande sank 17 per cent after the latest effort by the world's most indebted property developer to shore up its balance sheet fell flat.

China’s largest developer said in a filing on Wednesday that it raised $555m from a share placement priced at a discount of 14.7 per cent to the stock’s last close — far short of its target of just over $1bn.

Andy Maynard, a Hong Kong-based trader at China Renaissance, said the placement was “testament to negative sentiment for the stock and potentially the sector”, adding: “Most share placements, follow-ons, secondaries, IPOs have gone well [this year]”.

Evergrande said in the filing that the proceeds would be used for the “refinancing of existing indebtedness” as well as general working capital. It did not immediately respond to a request for further comment.

The share placement comes as the developer is struggling to reduce a debt pile of more than $120bn at a time when Chinese regulators have drafted new measures to curb leverage within the sector.

Market scrutiny of Evergrande has also increased in recent weeks after a letter circulated on Chinese social media in late September, purporting to show the company petitioning the government in Guangdong, where it is based, for help to stave off a potential cash crunch.

The document purportedly sought aid in securing regulatory approval to list its mainland subsidiary. A failure to proceed with the listing by January would enable investors to ask for their investments back, an amount totalling about Rmb130bn ($19bn).

The company furiously denied the letter, which it said was fabricated, and subsequently announced it had struck a deal with a majority of the investors that they would not ask for repayment.

But the weak reception for the share placement has triggered renewed volatility in Evergrande’s shares, which are down 26 per cent this year following Wednesday’s tumble.

The company’s US dollar bonds maturing in 2025 were trading at 77.6 cents on the dollar on Wednesday, edging down 0.6 per cent from 78 cents.

In March, Evergrande unveiled a plan to reduce debt by Rmb150bn ($22.3bn) annually to 2022. Between March and September, it said it reduced its total indebtedness by Rmb53.4bn.

The company is considering other steps to raise cash, include spinning off its property management business, recently valued at about $11bn. Hong Kong’s stock exchange approved the proposed spin-off last month.

China’s heavily indebted property developers, in which foreign entities hold huge volumes of outstanding debt, have been in the spotlight following the coronavirus pandemic.

Beijing has signalled concern over the amount of leverage in the sector, with local media recently reporting that the government had held a meeting with major developers and outlined a policy that would limit borrowing based on various accounting measures.

House prices in the country have risen sharply in recent months as the country’s economic rebound has accelerated. However, last month Evergrande discounted its new properties in China by 30 per cent, which it was “normal sales strategy” during the peak buying season in the country.

Credit Suisse, UBS, BofA Securities and Huatai International were joint bookrunners for the share placement.

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