The indebted Chinese real estate giant Evergrande climbed almost 15% in the stock market today after announcing the sale of a large part of its shares in a bank to a state-owned company and after Fitch again downgraded the group’s long-term debt rating due to uncertainty over its offshore bonds.
Although today is the deadline for the payment of 47.5 million dollars in interest on a batch of offshore bonds and the company has given no sign that it will meet it, its shares on the Hong Kong Stock Exchange closed with a rise of 14.98%.
This advance pales in comparison with that of its electric vehicle subsidiary, which continues to rebound (today, no less than 44.4%) after falling 9.4% on Monday due to its announcements that it does not have sufficient liquidity to continue all its operations and that plans to seek a secondary IPO in Shanghai were cancelled.
However, despite the roller coaster ride of the past few days, both Evergrande and its subsidiary have little reason to celebrate today’s revaluations: the parent has lost 78.3% since the beginning of the year and the electric vehicle subsidiary 95.4% since its peak in February.
Evergrande’s advance on Wednesday is due to the early morning announcement of an agreement to sell 19.93% of the shares of the commercial bank Shengjing Bank to a conglomerate owned by the authorities of the northeastern city of Shenyang, headquarters of the entity, and of the province where it is located, Liaoning.
The transaction is valued at 9,993 million yuan (1,545 million dollars), but these funds will probably not end up in the real estate company’s treasury, since Shengjing Bank set as a condition for approving the transaction that the net profits obtained by Evergrande go to pay the debts it has with the bank.
The reason given for the transaction is that Evergrande’s “liquidity problems” have “adversely and materially affected Shengjing Bank”.
In May, economic news portal Caixin had reported that Chinese banking regulators were investigating more than 100 billion yuan ($15.461 billion) in transactions between Evergrande and Shengjing Bank, which holds “large amounts” of bonds of its parent and, until now, main shareholder.
Although Evergrande assured that all its transactions with Shengjing Bank complied with the established regulations, shortly afterwards the Shenyang authorities asked the public companies in the area to “gradually” increase their participation in the entity in order to “accelerate its conversion into a good bank”.
Evergrande indicated that the arrival of the state-owned company to the shareholding “will help stabilize the operations” of the bank and that it will also “help increase and maintain the value” of the real estate company’s shareholding, which will go from 34.5% to 14.57%.
Fitch downgrades Evergrande’s rating
That sale could be a prelude to the restructuring of Evergrande which, according to analysts consulted by the Efe agency, would involve a break-up of the company – closing some subsidiaries not related to the real estate business – in which projects would be passed on to other developers to ensure their completion before a state-owned company would act as a “strategic investor” to solve the group’s financing problems.
While what happens in the future with Evergrande still remains in the realm of speculation, bad news continues to pile up for the conglomerate: late Tuesday night, debt rating agency Fitch downgraded the long-term issuer risk rating of indebted Chinese real estate giant Evergrande from ‘CC’ to ‘C’, the third lowest level on its ladder.
The decision came after Evergrande “probably” – it has yet to make a statement – missed last Thursday’s deadline to pay nearly $84 million in interest on a package of offshore bonds.
In fact, Fitch’s ‘C’ rating is used for companies that are close to defaulting on their debt obligations, as is the case with Evergrande: the covenants in its offshore bonds give it a 30-day extension after the due dates before it is officially deemed to have defaulted on its obligations.
The company did announce last week an agreement to meet its obligations to holders of a batch of onshore bonds, listed in yuan on the Shenzhen Stock Exchange.
In recent months, Fitch has downgraded Evergrande’s rating on several occasions: in June to ‘B’, moving to ‘CCC+’ in July and on the 7th to ‘CC’, before moving to the current ‘C’.
At the end of June, according to data provided by the group, its total liabilities exceeded $300 billion, of which it has to repay $37 billion in loans before the end of the first half of 2022.