Evergrande’s Hidden Debt Chasm Keeps Growing

Evergrandeit’s

ENGRNF 7.13%

latest announcement raises more questions about the actual amount he owes. Investors may not like the answers: especially since the hidden debt problem of Chinese property developers is not limited to Evergrande alone.

The embattled Chinese developer said on Tuesday that more than $2 billion in cash held by its separately listed real estate services unit had been seized by banks as collateral for third-party pledge guarantees. The subsidiary said it discovered this when preparing its 2021 financial report. Evergrande and the unit will not be able to meet the deadline for publishing their annual results before the end of March.

Evergrande did not say what these guarantees are for, or when the banks seized the money. But it is likely that they are related to the parent company. The lenders appear to be holding whatever assets they can still recover from Evergrande. This would likely leave even fewer assets remaining on the table for other creditors, such as offshore bondholders.

And investors have been largely kept in the dark about these hidden liabilities.

Evergrande Real Estate Services,

6666 2.68%

which generates apartment complex management fees, was expected to be a relatively strong business with recurring revenue and holding net cash. This assumption turned out to be rather rosy: the money seized by the banks comprises almost all of the money on its books.

Indeed, the unit was considered one of Evergrande’s most attractive assets. Evergrande attempted to sell its 50.1% stake in the unit for $2.6 billion to peer Hopson Development in October. That stake was worth $1.6 billion last Friday. Trading in the two stocks has been suspended since Monday.

It is now clear that how this deal fell through was a big red flag. Hopson said he wanted to deposit the sale proceeds with Evergrande Property Services itself, as it would be easier to collect monies owed by the parent company to its subsidiary that way. But Evergrande asked Hopson to send payment directly to her: a request the buyer refused. This seemed to indicate potential issues arising from related party transactions or obligations that would weigh on the true value of the asset even after the sale. These latest revelations lend even more weight to this interpretation.

The world’s most indebted property company, Evergrande, has embarked on a social media campaign to show construction has resumed and says it is doing whatever it takes to deliver homes. WSJ compares these messages with those of disgruntled buyers. Photo composition: Emily Siu

The hidden debt problem is probably not unique to Evergrande. Kaisa,

for example, surprised the market last year by saying that it had guaranteed certain wealth management products. More similar incidents may come to light as auditors have now been made aware of the issue. Evergrande said its auditor added a large number of additional procedures this year. Partly blaming Covid-19, a number of other developers such as Sunac and Ronshine also said they could not release their audited annual results on time. Some have changed listeners recently.

The Evergrande saga has been going on for months, but investors are still unaware of the value, if any, of the company. And, worryingly, several other prominent developers may be experiencing similar or even equally significant issues. China’s real estate debt problems are far from over.

China Evergrande Group: stalled construction, massive debts

Write to Jacky Wong at [email protected]

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