Evergrande Crisis Deepens Even As Developer Xinyuan Pays Debt

A Chinese real estate developer avoided a default on a maturing dollar bond on Friday, as China’s homebuilders struggled with the spreading impact of a debt crisis at China Evergrande Group, the world’s most indebted developer.

The swirling crisis has nevertheless continued to damage Evergrande, whose efforts to sell off assets in order to balance its finances took a blow when a potential buyer of its Kong Kong headquarters pulled out of the deal.

Further, the southern Chinese city’s auditing watchdog has begun probing the troubled developer and accountancy giant PwC over concerns about the adequacy of its 2020 accounts.

Xinyuan Real Estate’s bondholders agreed to an offer to accept new bonds and cash in exchange for maturing notes, the developer said in a filing to the Singapore Exchange on Friday. Xinyuan said that holders of more than 90% of the company’s $229 million notes due on Octover 15 had agreed to the exchange, which would see it deliver new bonds worth $205.4m and $19.1m cash.

Xinyuan’s 14.5% September 2023 bond crashed nearly 30% on Friday to trade at 58.35 cents, according to data provider Duration Finance.

Coupon Payments

The agreement follows warnings from other developers that they could default on their bonds, while still others have taken steps to delay payments in the wake of Evergrande’s troubles. China’s No.2 developer, with more than $300 billion in liabilities and 1,300 real estate projects in over 280 cities, missed a third round of interest payments on its international bonds this week.

Chinese developers face more than $500m in coupon payments on their high yield bonds before the end of this month. Refinitiv data show coupon payments by Kaisa Group Holdings and Fantasia Holdings are due this weekend.

In a sign that authorities may be trying to curb the impact of developers’ debt woes, Chinese regulators have told some major banks to accelerate mortgage approvals in the fourth quarter, Bloomberg reported on Friday, citing unidentified sources.

Lenders were also allowed to seek permission to sell assets backed by residential mortgages in order to free up more loan quota, the news agency said.

The PBOC and the China Banking and Insurance Regulatory Commission (CBIRC) did not immediately respond to Reuters requests for comment.

HK HQ KO

In Hong Kong, Chinese state-owned Yuexiu Property pulled out of a proposed $1.7-billion deal to buy Evergrande’s headquarters building over worries about the developer’s dire financial situation, two sources said.

The collapse of the talks for the landmark building’s sale is another setback for cash-strapped Evergrande.

Yuexiu, based in the southern city of Guangzhou, was close to sealing a deal in August to acquire the 26-storey China Evergrande Centre in Hong Kong’s Wan Chai district that serves as Evergrande’s local headquarters, the sources said.

The deal, however, faltered after Yuexiu’s board opposed the move over worries that Evergrande’s unresolved indebtedness would create potential complications in completing the transaction smoothly, they said.

Meanwhile, Hong Kong’s Financial Reporting Council said on Friday it had launched an inquiry into Evergrande’s accounts for the full year of 2020 and the first half of 2021, and an investigation of PwC’s audit of Evergrande’s 2020 accounts.

The FRC said Evergrande as of end 2020 reported cash and cash equivalents of 159bn yuan ($24.73bn), which did not cover its current liabilities of 1.5 trillion yuan, and had further borrowings of 167bn yuan maturing in 2022.

PwC expressed an unmodified audit opinion in its auditor’s report on the 2020 annual accounts, but made no reference to material uncertainties regarding whether Evergrande was a going concern, the FRC said.

Bond Slump Deepens

Worries of contagion from the crisis have hit property developers’ shares this week. On Friday, an index tracking A-shares in the sector gave up small gains to end down 0.1%, lagging a 0.38% gain in the blue-chip index and taking losses since Tuesday to 4.5%.

Apart from Xinyuan, Duration Finance data showed other developers’ bonds deepening their rout on Friday. Sinic Holdings Group’s 10.5% June 2022 bond dived more than 20% to just 12.25 cents, and Ronshine China Holdings’ February 2022 bond fell more than 6% to 68.35 cents.

Spreads on Chinese high-yield corporate dollar bonds touched a fresh record late Thursday evening US time, having nearly tripled since late May, while investment-grade spreads remained near their widest in more than two months.

China has been ramping up property market curbs since late 2020, introducing new measures to closely monitor and control the debt levels of developers.

But with economic growth cooling and new construction starts slowing, speculation has been rife over whether it would start relaxing those restrictions, as was done during past downturns.

Chinese leaders, fearful that a persistent property bubble could undermine the country’s long-term ascent, are likely to maintain tough curbs on the sector but could soften some tactics as needed, policy sources and analysts told Reuters this week.

Yi Gang, governor of the People’s Bank of China, told 24 financial institutions last month to “maintain the steady and healthy development of the real estate market and safeguard the legitimate rights and interests of housing consumers.”

Another central bank official said on Friday the spillover of Evergrande’s debt problems on the banking system was “controllable” and individual financial institutions’ risk exposures were not big.

Authorities were urging Evergrande to step up asset disposals and the resumption of projects, Zou Lan, head of financial markets at the PBOC, told a briefing. Evergrande had blindly diversified and expanded its business, Zou said.

Chinese regulators, who want to impose financial discipline while avoiding social unrest, have taken targeted measures such as asking state-backed firms to pick up Evergrande assets to ease its liquidity situation.

• Reuters with additional editing by Mark McCord