Chinese government probe casts new doubt over Evergrande restructuring

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Evergrande, the struggling Chinese property developer, has cast serious doubts over the future of its debt restructuring plan, saying an ongoing official investigation will prevent it from issuing new notes.

Evergrande defaulted on its debts almost two years ago, sparking a cash crunch across China’s economically critical property sector and prolonged negotiations with offshore creditors.

The world’s most indebted developer, which had more than $300bn in liabilities at the time of its failure in 2021, had planned to issue various notes, including those linked to its listed subsidiaries in Hong Kong, and was expected to hold key creditor votes this week.

But in an unexpected move late on Sunday, Evergrande said it could no longer issue “new notes” because its mainland business Hengda Real Estate was “being investigated”. This was an apparent reference to an investigation by the China Securities Regulatory Commission into a suspected breach of information disclosure rules. The company disclosed the investigation in August.

The company cited the need to comply with new rules issued by the CSRC earlier this year, as well as with debt measures required by China’s National Development and Reform Commission.

While Evergrande did not state whether regulatory bodies had directly intervened in its plan, people familiar with the negotiations said the company’s advisers confirmed the CSRC had rejected an application to issue new equity and equity-linked notes.

“How can a process that has run for two years . . . [with] a whole army of offshore and onshore advisers . . . suddenly be derailed at the eleventh hour?” one of the people said. “It does feel [as if] it has been derailed either by a miscoordination or a very controlled co-ordination”.

The person added that there was “no way a restructuring can be completed” without Evergrande being able to issue new debt or equity.

Beijing has so far prioritised the completion of residential apartments amid a two-year cash squeeze on construction that has caused dozens of defaults across the property sector, which typically accounts for more than a quarter of China’s economic activity.

Early in the coronavirus pandemic, the government sought to rein in developer leverage. But it has lately come under increasing pressure to introduce supportive policies after Country Garden, formerly China’s largest developer by sales, came close to defaulting on its debts last month. Beijing has in recent weeks cut borrowing rates while major cities have backtracked on policies designed to constrain home prices.

The restructuring of Evergrande, which in July disclosed losses of $81bn over the course of 2021 and 2022, has been closely watched given parallel restructurings by other developers that had also borrowed overseas. The process is also seen as a gauge of overall momentum towards resolving the property sector’s woes.

But it has been marked by a lack of transparency. Evergrande initially missed international bond payments in September 2021, but provided no official statement and was eventually declared to be in default by rating agency Fitch in December that year.

The company’s plan, mooted in March this year, involved providing creditors with notes linked to equity in its Hong Kong-listed electric vehicle business and property management business. The subsidiaries and parent company have resumed trading in Hong Kong in recent months.

In a separate filing on Friday, Evergrande cancelled creditor meetings expected this week and said that group sales since March had “not been as expected by the company”. It had previously deferred the meetings.

Additional reporting by Wang Xueqiao in Shanghai