The chairman of China’s Evergrande has been placed under police surveillance as the company faces mounting debt and possible liquidation.
China Evergrande Group Chairman Hui Ka Yan has reportedly come under police investigation, according to Bloomberg, adding to further uncertainties over the embattled developer’s future as it faces the looming prospect of liquidation.
Evergrande remains the world’s most heavily indebted property developer and has been at the center of an unprecedented liquidity crisis in China’s property sector, which accounts for about a quarter of the world’s second-largest economy.
The financial troubles of Evergrande, once the best-selling developer in China, became public in 2021. Since then, amid declining home sales and fewer fundraising opportunities, it and many of its peers have defaulted on their offshore debt obligations.
What’s next for Evergrande?
Given weak cash flows, Evergrande is actively seeking approval from its creditors to restructure offshore debt amounting to $31.7 billion (€30 billion), which includes bonds, collateral and repurchase obligations.
The proposed plan presented in March this year includes various options for offshore creditors, including converting some of their debt holdings into new bonds with a maturity period of 10 to 12 years.
However, a recent announcement over the weekend that it would be unable to issue new debt due to an ongoing regulatory investigation at one of its main Chinese units has disrupted these plans.
A significant group of Evergrande’s offshore bondholders intend to join a liquidation petition scheduled for hearing in Hong Kong on October 30, unless Evergrande can present a new restructuring plan before that date.
Government intervention is unlikely to support Evergrande and provide immediate liquidity. While liquidation remains a possibility, it could be the worst-case scenario for Evergrande, as the company would cease to exist and its debt would be reduced to zero, which would have a far-reaching impact on its creditors.
In such a scenario, offshore bondholders would retain the ability to pursue claims against the company’s officers, officials and offshore assets, giving them some opportunity to recover a portion of their lost investment.
Now what will happen to Hui Ka Yan?
Hui founded Evergrande in Guangzhou in 1996 and took the company public in Hong Kong in 2009. The company experienced rapid growth through an aggressive land acquisition strategy supported by debt and selling apartments rapidly at low profit margins.
However, Evergrande’s liabilities exceeded $330 billion (€312 billion), and the company came under heavy pressure as China’s property market weakened following a government crackdown on debt-fueled building expansion.
Evergrande’s structure and its operating practices under Hui’s leadership have come under scrutiny as the property empire begins to weaken amid increasing pressure to meet repayment obligations and complete apartment construction.
Bloomberg News, citing sources, reported that Hui was taken into police custody earlier this month and is currently under surveillance at a designated location.
The development follows an earlier announcement by police in southern China that they had detained some employees of Evergrande’s wealth management unit who had raised money from individual investors through the sale of investment products.
These actions of the police show that Hui will not be able to hold the command of the company for long. However, it is not clear who will succeed him, or whether the government will have any involvement in the management of the company.
How did Evergrande attract so much public attention?
Evergrande’s meteoric rise has led it to become one of China’s largest and most profitable property developers, with sales of $110 billion (€104.2 billion) in 2020.
During its peak, the developer’s rapid borrowing spree made it the largest dollar bond issuer in the region. After missing several bond payments in late 2021, the company’s entire offshore debt was classified as in default, leaving creditors grappling with a resolution.
Evergrande’s decline began to affect the wider Chinese property sector as credit conditions worsened, and rival developers found themselves struggling, with some forced to default.
Has China attempted to regulate?
After maintaining silence on the Evergrande crisis in 2021, in October of the same year a central bank official blamed the company’s troubles on its poor operational and management practices. The official said Evergrande has “blindly diversified and expanded its business.”
As the crisis escalated, a risk-management committee was set up at the developer in December 2021, consisting of executives from state-owned companies, to assist in its debt and asset restructuring. Soon after, authorities moved quickly to reassure markets that risks to the property sector and the economy were manageable.
While direct state support for Evergrande remains uncertain, Beijing has implemented a number of measures to boost the property sector in the past year, including giving priority to developers completing unfinished homes.