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Creditors and analysts are not convinced by China Evergrande Group’s proposal to restructure its offshore debts, which is seen as a test of investor confidence in the financially-strained real estate industry. The restructuring plan, which involves a lengthy repayment period and insufficient incentives, has failed to impress. Evergrande is currently the most heavily indebted developer globally, with approximately $300 billion in liabilities.
All of China Evergrande Group’s offshore debt, which amounts to $22.7 billion, is considered to be in default. The company’s proposal to restructure this debt offers two primary choices for its dollar bondholders to recover their Investments. The company’s offshore debt restructuring, which is China’s largest to date, is intended to prevent a chaotic collapse.
China Evergrande Group’s creditors have two options to recoup their investments in the company’s offshore debt, which is in default. They can either exchange their entire holdings for new notes with maturities ranging from 10 to 12 years or convert them into a combination of new notes with tenors from five to nine years and equity-linked instruments. Investors who hold notes issued by Evergrande’s offshore units can also exchange their existing debt for new notes that will start paying interest four years after issuance.
The success of Evergrande's debt restructuring plan is likely to affect other Chinese developers who have defaulted on their repayment obligations over the past year, and similar proposals are being considered. As a result, an index tracking mainland-based property developers fell by 0.5% in early afternoon trading last week, while the broader stock market index rose by 1.3%. Trading in Evergrande shares was halted.
Sunny Jiang, who is in charge of fixed income investment at Haitong International Asset Management Ltd, expressed dissatisfaction with the Evergrande debt restructuring plan, stating that it lacked additional credit enhancement, and the new tenors were too lengthy. He also expressed concern that if the plan were to be approved, it might set an unfavourable precedent for other developers who are considering restructuring proposals. This, in turn, could make it even more difficult for bondholders to recover their investments.
Certain investors who hold bonds in Evergrande are pressuring the company to improve the terms of its debt restructuring plan by including domestic assets, but the proposals put forth last week did not meet their expectations. An anonymous dollar bondholder compared the restructuring plan to lending a bucket of rice and only receiving two grains a year in repayment. Another creditor mentioned that the proposal was based on certain assumptions, such as the ability of Evergrande and its two Hong Kong-listed subsidiaries to resume trading and maintain their operations even without sufficient funding.
In its announcement last week, Evergrande stated that it would require an additional financing of 250-300 billion yuan ($36.65 billion) to resume its activities over the next three years. China Evergrande New Energy Vehicle Group revealed that it might have to cease producing electric vehicles if it was unable to secure fresh funding.
If Evergrande is unable to proceed with its restructuring plan, it may face liquidation proceedings brought by an investor in one of its subsidiaries in a Hong Kong court. A spokesperson for Top Shine Global Ltd, the petitioner for Evergrande’s winding-up, stated to Reuters that the investment firm was still evaluating the proposal to determine whether it would support the plan or continue pursuing the liquidation request. Evergrande, on the other hand, claimed that an analysis it commissioned indicated that offshore creditors would recover less than $1.5 billion in a group-wide liquidation, with a rate ranging from 2.1% to 9.3% depending on the type of debt held.
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