Evergrande’s statement on Thursday was brief and ominous. Xu Jiayin, the billionaire chairman behind the debt-ridden Chinese real estate group, has been subject to unspecified “enforcement measures” on suspicion of “illegal crimes”.
The one-page press release was generally short on details about the company, which has been locked in an opaque restructuring process since defaulting on international debt two years ago. But between the lines, it captures a broader emotional shift.
This was originally intended to bring investors closer to a deal after two years of intense negotiations. Instead, Xuchang’s uncertainty is just one of a series of indicators that appear to make Evergrande’s fate more difficult to determine.
Shenzhen police said employees of its wealth management subsidiary were also detained this month. Its restructuring plans were derailed this week by an official investigation and it has also failed to make payments on onshore bonds.
The future of the developer, which has more than $300 billion in debt, is more tied to Beijing than ever.
Policymakers are under pressure to respond to a housing market slowdown that shows few signs of ending. Since Evergrande defaulted, the industry typically accounts for more than a quarter of economic activity, and the impact of the three-year zero-coronavirus policy has weighed on economic growth.
One person involved in real estate projects in mainland China said the investigation into Xu was part of a “standard playbook”. “Things have fallen apart and people need to be held accountable,” he said.
Against this backdrop, the debt restructuring of the world’s most indebted real estate developers has attracted more attention.
“We know very well what will happen if we don’t restructure,” said a person familiar with the restructuring discussions. “This will be a huge reckoning that will have profound consequences for everyone involved in the company’s history: directors, advisers, auditors.”
Investors in Evergrande’s multibillion-dollar offshore debt are due to vote this week on a plan that would see them receive new notes tied to stakes in the group’s Hong Kong-listed unit. Evergrande shares have been suspended since March 2022 in anticipation of approval of the plan, and trading resumed in late August.
$300 billionEvergrande’s total expected liabilities
But the plan was derailed at the last minute. In a filing with the Hong Kong stock exchange, the company cited an official “investigation” as the reason for the delay. It did not say who was conducting the investigation. In August, the company said the China Securities Regulatory Commission launched an investigation into information disclosure issues.
People familiar with the matter said they were told that the Securities and Futures Commission had rejected an application to issue new equity-linked instruments. It is unclear why the application was rejected.
Evergrande has hired the American law firm Houlihan Lokey and Sidley Austin to represent it in offshore restructuring negotiations.
Investors holding about $20 billion in international debt at the time of the default, represented by law firm Kirkland & Ellis and investment bank Moelis, have threatened legal action in 2022 and complained about a lack of participation. When the now derailed plan emerged in March, the mood improved.
One person involved said a lot of “strategizing” had taken place this week to try to “rebuild” the scheme in a way that avoids any conflict with the Securities and Futures Commission.
Brock Silvers, chief investment officer of Hong Kong private equity firm Kaiyuan Capital, said the restructuring had suffered a “setback” but said “all parties are eager to avoid bankruptcy.”
He said investors in the U.S. dollar bonds were “not in a secure position” but “could still put the company in a sharply worse position” due to their legal claims, while regulators “need Evergrande to survive to boost the economy and calm domestic investment.” producers and suppliers.”
The disappearance of dollar bonds “will also undermine the prospects for offshore bond issuance” at a time when China is desperately seeking foreign investment.
Evergrande Group disclosed in July a loss of $81 billion in 2021 and 2022 and this week failed to pay 4 billion yuan ($548 million) in mainland bonds, according to documents filed in Shenzhen. Silvers noted that authorities are “very sensitive to this kind of domestic market turmoil.”
At the start of the outbreak, Beijing introduced leverage limits on developers and other policies aimed at stopping the property market from overheating. However, the company is now showing signs of easing its policy as sales at major developers slump. In recent weeks, the city has lifted some purchasing restrictions for first-time homebuyers.
Ratings agency Fitch said on Thursday that pressure on China’s real estate sector will “continue to pose cross-sector credit risks in the near term” and that “the government’s so far benign policy easing is unlikely to drive a sharp shift in homebuyer sentiment.”
While the government’s stance on Evergrande and its restructuring is unclear, new announcements related to Mr. Xu hint at consequences for the individuals involved.
Xu Zhian, who was born in 1958 and founded Evergrande in the 1990s, was once known for his political connections but was excluded from the Chinese People’s Political Consultative Conference, the government’s advisory body, in 2022.
Uncertainty about his whereabouts only adds to doubts about the shakeup. “No one wants to take public responsibility for the name in any way,” a person familiar with the matter said.
“You don’t really know who controls the company,” the person added, pointing to the company’s board of directors, executive management team and risk committee involved in the restructuring. “Trying to understand who the relevant decision-makers are is very difficult.”
Additional reporting by Gloria Li in Hong Kong and Cheng Leng in London
Svlook
