[The REDD Insight is a daily market comment produced by senior members of the REDD Intelligence newsrooms. The views expressed in this report are solely those of the author(s) and are not necessarily either shared or endorsed by REDD.]

“Every situation is different. Every outcome is different.” – Colleen Hoover

On 17 July, Hong Kong was under typhoon signal no.8 and warning of heavy rains. That did not deter the Guangdong government from sending its working group for China Evergrande Group to the city to attend a scheduled meeting with lawyers representing the developer’s bondholders.

Their Hong Kong counterparts had no choice but to meet in one of the lawyers’ home. The Chinese officials arrived soaking wet, changed into lounge clothes, and went straight into discussions over the restructuring.

Tasked by Beijing to clean up the Evergrande mess, Guangdong was eager to get a deal done, driven not only by a desire to save a company that was born in the province but also by the success the Hainan government had managing HNA Group whose CNY 1.9tn (USD 260.9bn) debt is comparable to that of Evergrande.

This soon took a drastic turn after the provincial government concluded that the developer’s chairman and founder Hui Ka Yan was not only slow to use his personal fortune to finance home deliveries as promised, but also allegedly moved company assets, according to sources briefed on the matter.

The Guangdong government found suspicious mismatches in Evergrande’s financial position, one of the sources added. The company reported CNY 2.38tn (USD 328bn) of liabilities and CNY 1.74tn (USD 238.9bn) of assets as of its 30 June interim report after its auditors recognized debt kept off the books.

This may sound impossible with the working group stationed at Evergrande since early 2022. However, the reality is the company’s massive and complex corporate web with multiple layers of special purpose vehicles and joint ventures made it difficult for outsiders to figure out where the money was.

Those familiar with HNA may be experiencing déjà vu. The working group parachuted into HNA by Hainan took months to untangle the complex corporate structure of the distressed aviation giant – including over 2,000 entities – only to discover that a lot of assets had already been siphoned off during that period.

However, the fate of the two giants diverged from there. HNA announced its restructuring in early 2021 and its chairman and founder Chen Feng was arrested months later. HNA completed its restructuring in April 2022.

Once Guangdong reported Evergrande’s updated conditions to Beijing, whatever regulatory support it had for its offshore restructuring disappeared. Hui was put under police control and the restructuring of the developer was called off on the grounds that an investigation rendered it impossible to satisfy regulatory requirements to issue new bonds that were key to the restructuring.

Three weeks have passed since the deal was put on ice and Beijing has remained silent amidst increasing concerns about whether Evergrande will go bankrupt, threatening the country’s financial stability.

To make sense of the government’s decision, there are three questions to consider. The first is what is Evergrande’s value to Beijing?

It is no secret that the President considers the highly leveraged real estate sector as an economic Achilles heel and Evergrande the obvious poster boy. While HNA had valuable assets, including 14 airlines holding 12 domestic and nine international aviation licenses as well as a Singapore-listed logistics company, a restructuring ensured their survival while a trust with a 10-year life span was set up to take care of the disposal of the remaining assets.

Evergrande’s assets are mainly properties while its real estate management subsidiary has a doubtful revenue stream thanks to management fee waivers promised by Evergrande to lure customers into buying its flats.

In the eyes of Beijing, the only reason that it should live for the moment is to complete unfinished homes so homebuyers will not stop paying mortgages, affecting financial and social stability. This should take a few years after which Evergrande will no longer be useful.

What’s the impact of not restructuring Evergrande’s USD 31.7bn offshore debt?

Some creditors may file for bankruptcy but would have no access to onshore assets and therefore, the move would have a limited impact on home deliveries. Back in 2018, concerns over the involvement of overseas regulators and the impact on investor confidence got Beijing to largely pay off HNA’s offshore debt. For Evergrande, both factors are now far less of an issue.

Hong Kong’s regulator also has little concern for Evergrande’s offshore bank borrowings which were cut significantly following instructions issued to banks to reduce POE exposure as early as 2017 in view of HNA’s offshore buying spree, said a regulatory source.

Whereas the international bond market has remained largely closed to Chinese developers, Beijing is adamant that investors have a good understanding of the risks behind the high-yield bonds they purchased. For years, it is understood that Chinese regulators also investigated the distribution of high-yield bonds among an issuer’s controlling shareholders, their friends and families as well as political backers.

What’s the impact of not conducting an onshore restructuring?

A restructuring is not a prerequisite for Evergrande to complete the homes it presold. It’s hard to imagine any creditor getting a bankruptcy order from any Chinese court without government approval. This would explain why Evergrande has not proposed any onshore restructuring so far while pursuing one offshore.

Given all these factors, a stalemate is the likeliest outcome, a situation that may not necessarily be bad in the eyes of Beijing given its other pressing responsibilities.

by Shirley Yam and Kai Chung Lee