You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain non global business so you can invest better across the Pacific rim. I'm Tom Corbett in Hong Kong.
And I'm John Lee. Evergrand has become the mother of all casualties in China's real estate crisis, crumbling under the weight of its own debt and leaving home buyers investors reeling.
The latest twist in the Everground saga came this week when a Hong Kong judge ordered the property giant carved Up liquidated, more than two years after it first defaulted on a bond payment.
The judge's ruling is a far crime from closure for Evergrand's creditors, who could now face a long and complex road that may not even end in recovery.
Can Evergrand's bond holders ever be made whole? And what will it take to restore confidence in China's property market? And why might the worst not yet be over?
Let's find out with two Bloomberg Intelligence experts. Christy Hung is senior equity analysts covering China real estate.
And Daniel Fan is senior credit analyst covering China property developers. Christy and Dan, welcome back to Asia Center EC.
Thanks for having us.
Good to be here.
Christy, why is the quote ruling so significant for Evergrand?
I think we are two years into Evergrand saga, and I think it's latest liquidation also shows us how, you know, China is very far from resolving the crisis for his housing market and we have seen, you know, waves and waves of policy stimulates so far still failing to revive housing market sentiment on the ground.
And Daniel, do you think foreign investors, in particular offshore creditors can get recourse to any of the assets Evergrand holds in China.
I think it's not that easy. I think the way the liquid Data is trying to do is trying to not to touch the onsore cost system. So basically, they in my in my mind I don't have all the information, they try to take over the Hong Kong LISCO and try to collaborate onsore and upstream whatever they are able to upstream after like resolving all the onsore that issue.
So instead of an outright liquidation putting all the assets for like you say, our sales, they're going to maintain the onsore operations and then cares out over a longer period of time to avoid all the legal complexity and possible damages. I think that is the way to do it. But if you look at the bond price, actually it's one to two cents. It's basically reflecting the two listing company that evergrant has that equity stay in. That's the
market value of the two subsidiaries. I think there's something Liquidata may able to do. There are some transactions which were not clear that the holding company and the subsidiary have done in the past. They may be able to recoup some of that money, but it all depends on where the money's gone.
It's importantly you believe that the mainland operations will still continue, the still build and complete houses.
I think it's kind of a more practical way to do it otherwise, because the Chinese government always emphasized home delivery. If you're able to maintain the onso operation, I think it could be a better way because it's very difficult to find a buyer for the stress as in these days.
Mainland China could always ignore the Hong Kong Judges ruling if it chooses to go that route. Christy Hony and Daniel Fan what does that do for bondhol lose Where does it leave them?
Think about the claims of different stakeholders. We have every grand suppliers who need to be paid before they would proceed with construction of the projects. And then we have home buyers who are demanding their presole homes to be completed. And then we have creditors from on shore banks, trusts, bondholders. In the offshore market, we have bondholders and equity investors. And I think then the question is would there be any government intervention to the hierarchy of the claims for
every grand's case. Apparently the government's priority would be to complete presto homes and maybe to pay the suppliers bill on shore. And I think the way this is going to be handled is going to impact confidence for especially foreign investors on Chinese entities.
Yeah. I just in addition to what CHRISTI mentioned, the way they are doing it is trying not to touch the onsore bankruptcy system. I think they're doing it in a more practical way as Christian Mansuin or the priority claims ahead of short predators. So yeah, I think the Regon Agency mentioned about subordination risks, and this has always been the case.
Christy Dan, how do you see this liquidation order from the Hong Kong judge shaping sentiment and perceptions of foreign investors when it comes to investing in China.
I think it matters, given the impact is going to have on the perception of foreign investors. You know, how China is going to handle the legal rights of Everigrant's off shore bond holders might be interpreted as signs on whether the country is backpeddling on its opening up of its capital market. If Hong Kong listed Chinese entities like Everygrant will struggle with the ESSSS in China. It might also impact Hong Kong's role as a fundraising hub for Chinese corporates.
And Daniel, what signal does this turn of events sent to Evergrant's foreign bondholders and what does he say about the risks of investing in China.
I think the risks of investing in China is like many other ed markets in the past. We have seen similar cases in Indonesia where like foreign creditors when they try to make their claim, you need to go through the local cost and the local law, which goes back to the question of structurals of ordination. I think the key thing about this situation is basically, first is the macro economic situation in China, so in the book market structures of ordination is not an issue. And the other
thing is more about government's policies. Chinese government used to be wearing pro business, so credit risks and subordinates and risks are less of a concern. But then those are the two key factors affecting foreign investors' mindset when they think about investing in China.
And where do the mortgage holders stand? We have thousands and thousands of home buyers who paid good money for homes that are still sitting unfinished to this day. Where do they stand in the pecking order of creditors and claims on assets?
Yeah? So evergrand has over six hundred billion of PRESO homes pending delivery as of mid twenty twenty three, and they're winding up order. I think it's going to do another blow to confidence in China's housing market, which is already very fragile to begin with. Think about how this will likely be a drawn our liquidation and how many more years Evergrant's home buyers will have to wait before
they can see the preso homes being completed. I think this is going to put a big question mark on the part of Chinese households, asking, you know, can I ever trust preso housing projects in China by a private developer. In fact, we're already seeing Chinese home buyers they're pivoting to secondhand homes because what you see is what you get. But Priso Holmes is the one that's contributing to China's GDP, because that's involving new constructions.
You're listening to Asia Centric from Bloomberg Intelligence. By the way, if you like what you hear, and we hope you do, please rate us on Apple Podcasts, Spotify, or wherever you may be listening to us. Of course, more stars are better. Your feedback matters, and we love hearing from our listeners.
I read some published accounts that the Hong Kong Judge was a bit frustrated at the pace of progress In all this, didn't Evergrant's management show any interest in promoting or putting forth a restructuring plan or do you think they were just throwing in the towel and just washing their hands of it.
I think they are trying to arrive in an agreement at the end of the day. I think at these company's the biggest shareholder is still the funder and the chairman. Their equity state is in it. But at the same time their hands are tied by what's happening onsore and also by the complexity of their death structure. So I think probably that proposal is the best they're able to
come out. Obviously the other side also want more, so I think at the point they are not really able to arrive at some point of like would think that's are feasible. I think that's the key issue, and I think.
The slow pace of the restructuring process is not unique to everygrant you know. Evergrant's liquidation could serve as a warning to its peers. If we look at the nine in solten traffic developers that we cover so far, only two have completed their restructuring, so there are others that are also in a state of limbo. And it's not just Evergrand, but hopefully the verddic for Everygrant could motivate the others to f finally get their X together and move toward a dead deal.
And Christy, that begs the question which developer could come next?
So of the developers that we're covering or outside of our coverage, developers that are more prominent Kaiser and Logan are next to have their winding up hearing in February. And for developers that we cover, we also have she Mao. It has defaulted on its offshore bonds for eighteen actually nineteen months now, you know, for everywhere is about two years, so Simao is around nineteen months. And this also has
dragged on for a long time for other developers. So for this process, you know, the longer it drags on, the bigger exposure that the companies might have to potential litigation risk if creditors are impatient with the process.
And Daniel Fan Christy Hung give us a little perspective in some bigger picture perspective here, how would you characterize the judges order against the broader backdrop of this entire Everground property drama. Is this carving up of the cadaver of Evergrond so to speak? Is this the final step, you know, the sword and paling the wounded beast? Or is it just one more step in an endless legal drama that's going to drag on for years.
From my perspective, I'm also looking forward to the revelation from the liquid Data's investigations of Evergrand's books, as in what actually went wrong inside the company, you know, where they're more acts of frauds than the markets that we are aware of, And what happened to the money that is supposed to be insider as crow A kant to complete the projects? Where did they go? And we have
many questions that we are still seeking answers for. And I think the liquidation process could give us some insights and also perhaps insights to the authorities on how to better regulate China's housing sector in the longer run.
You made an interesting point there. Evergrand is seen as a badly run company, right like a company that fell on its own sword. It branched out to making electric vehicles, it earned the football team, It really fueled its growth with debt. Is that right? Or is this, you know, representative of the whole sector.
I think Everygrand is unique. It was at one point the biggest Chinese developer by home sells, but it's also the most leveraged. It has embarked on this period of taking excessive debt to drive its land bank expansion. On one part, issues with his cash flow management. You know, when the housing market sentiment quickly slows, that is going to impact its home seals and its ability to repay. And it's like a domino that fell. But I think at the same time there are also legit questions that
investors should raise on the company's corporate governance. You talked about is in branching out into different investment into energy, vehicle, soccer team. And there are also questionable transactions that we have seen between Evergrand and its property management units that we have seen money missing, and we're looking for some more details from the liquidation as to what other areas that could have ran wrong in the process.
When business historians and economists sit down and they write their books about the Evergrand saga, what do you think they're going to say about it? How will they describe it? What lessons are they going to draw?
I think the lessons is more about why, because to me, the China property setup is a highly regulated center. From the land acquisition step one. Land price in the often process is regulated. When you launch a project is regulated, when you try to launch a project at a certain price is regulated. Obviously, Evergran has a lot of us sort come but I think in a highly regulated environment,
we need to learn from the past. What are the factors contributing to the fact that it allows Evergrand to blow from a very small development to the country's largest. I think that is the biggest question.
Yeah, I think it also reveals how the timing of the regulation is critical because in twenty sixteen through twenty twenty one, China has went through this period of exuberance growth in its housing market. But if we look at
Everywhe's balance sheet, you know it's not that tequity. It was over three hundred percent at one point, and I think it could be argued that regulatory efforts could have come in earlier to cool down the market and try and help some of these developers the leverage earlier than in twenty twenty one when the spirit lines came in
and the bubble spot. The downturn came very drastically, and what happened with Every Grand spread to a lot of other private developers and the damagers to confidence was done to the market in a way that you know, we are two and a half years into the crisis, and right now it's like, no matter how much the government
is trying to push our more policy support. The market is not reacting, home sales is not picking up, and China is now in a very difficult situation with its housing market when the damagers to confidence is very hard to be undone.
And Christy talking about confidence, This court ruling could not have come at a worse time. China's stock markets have been reeling, the authorities have been trying to prop up the equity markets. Do you think this is a big blow to authorities efforts?
I think just in the recent weeks, we have seen a wave of stimulus measures. You know, on Thursday we have the government coming out saying we are going to support commercial property loans from developers. On Friday is talking about supporting the financing of property projects, and then on Saturday we have Guangzho rolling back its home purchased cubs.
So all these steps taken to try and prop up the housing market in China, and yet we have this liquidation from Everygrand and it's like boom reminding people about the health of the China real estate industry and reminding
people to be cautious about private developers. Given you know, this is the fate of Everygrand, which is the first one to default On is dead, but we still have a lot of other developers that are suffering from non payments and not anywhere near to reaching a restructuring deal. And it means that you know, we're seeing this drawn our process of recovery for the sector, and that's still a question mark in a lot of whome buyas mind thinking can I invest in a property right now in China?
Daniel? Last question to you, what is evergrand saga going to mean for the high yield issuance market?
Oh, it's actually very damaging if you look at what happened in terms of issuance or the issuance market. Is that so meaning that they're not able to get any financing also and Onsolt they get limited with financing. And also if you look at the financials, I would say it's worse than like two thousand and eight crisis definitely, and probably worse than the Asia financial crisis when you look at the numbers from a bottom up perspective. So meaning that this setter is not going to recover any
time soon. Maybe it would become like a much smaller sector in the years ahead.
Okay, Dan, you might have to expand your coverage there going forward.
Thank you.
We've been discussing ever Ground and the latest chapter in China's property crisis with Christie Hung, a senior equity analyst covering China properties, and Annual Fans senior credit analysts covering China real estate, Christy and Dan. The drama continues to unfold and we look forward to tracking developments as they happen and keeping in touch again.
Thank you, Tom, our pleasure to be here.
Thank you everyone.
I'm Tom Corbett in Hong Kong.
And I'm John Lee. This podcast was produced by Clara Chan and you've been listening to the Asia Centric podcast