China’s Mega Restructure; Trouble in India

based in Hong Kong. Thanks for having me. We'll be discussing a big Indian story with her in a bit. Spoiler alert, it's not a danny that it could be heading that way. Before we get to that, Alice, what's the mood in Hong Kong right now? I was there a few weeks ago and everyone was still wearing masks in the street. Anyone who didn't risk the hefty fine the whole worlds now is betting on a big China reopening. What's the story there? Yeah, I mean personally, I'm definitely

a very excited. No, but you know what surpride new is after all, almost a thousand days of the mask mandate and now the government dropping it. Actually, most people still choose to wear a mask, so we actually had a story on that today about walk out on the street, and most people are still wearing it. But I think the market is very excited about Chinese and Hong Kong government opening out. So you can see all the markets are turning up in the region here today. Very interesting.

Let's hope it keeps moving in that direction. And I really do look forward to getting back to Hong Kong. What great city. So Alice, let's talk ever Grand. But before we dig into the credit story for listeners maybe not familiar, what is it? Why do we care? And why has it dominated the headlines in Asia and around the world for so long? Yeah? What is ever Grand and why do we care about? The story? So the sheer size of it that should be enough to catch

reader's attention and listeners. In this case, this is the company that was founded in nineteen ninety six and just like a lot of other developers in China, property developers in China, IF relied heavily on borrowing to feel its growth, and dollar bombs is among them. So it had about one point ninety seven trillion yen that is two hundred and eighty seven billion US dollars in liabilities as of June twenty twenty. First, that is the most among its

developer peers in China. It also was the largest dollar debt borrower among its peers. So what happens when it really carries broader implications for the whole dollar bond market in the region as well as China's nearly sixty trillion US dollar financial system, and it has defaulted in It defaulted in his US dollar bob in late twenty twenty First Fastful, We're now in March twenty twenty three, and creditors are still not see in concrete progress on this

debt restructuring. So that is why it's still dominating that lie, you know, because people are paying attention to debt restructuring progress. And also Everground's restructuring will set examples for other real estate firms from the nation. The sector has snowballed into record amount of default from once being one of the

hardest bomb markets in the world. And Everground's own restructuring will be China's largest ever and it is only the only restructuring that's going on in the sector right now. That is carried out by dominated by the government. So let's just back up. The Everground is a property developer. They make property. Surely that's a good business to be in. It's a huge population, there's a need for housing in China. What's what's going Why can't they why can't they pay

their debt? Yeah, so let's talk about that first. How you know, it's a private developer in China. It's one of the largest. It owns. It says it owns more than one thousand projects across almost three hundred cities in China. UM and really it's problems started in twenty twenty one. It had in liquidity scare and then it's that it's going to outline a problem to solve its liquidity issue.

But at that time China wanted to address UM the overleveraged problem that has been existing in this sector for a long time. UM and that is essentially what's happened. You know, this is not an issue that is only belonging to everigrants. All of them are under the government's regulatory crackdown. So all of them had run into the regulatory tightening. And again that is not happening only with

the real estate sector. Either China has cracked down or as we have seen on the education sector as well as the technology sector. So China's housing markets began to slow down because the government don't want people to the government's chanting slogan. Slogan is housing is for is not for speculation, So they don't want you to speculate on buying anymore. Um And we also know what happened during

the pandemic. China's economy is not growing as fast as it used to be um And China's population is also shrinking now for the first time in a long time. Um And so there's the demound size of or shrinking. So all of those components adding up together right now is a hard time for China's real estate sector. So they built too much, They browed too much money, They built the wrong kind of housing. What was wrong with the business model? Yeah, like you know, you pointed out exactly,

they borrow too much. They rely too heavily on borrowing to fund its growth. And it's been a lot of borrowing in a very short amount of time that is really posing risks to the whole nation's financial system. That's why China wanted to crack down on it. So they have how much debt? Well, I just mentioned ever, grind alone has over two hundred eighty billion US dollars in liabilities as of June twenty twenty first, and that's this company alone. Yeah, and what's the latest situation with them

trying to figure that out? They're in the restructuring. What are the key dates we're looking for here? Yeah, they're in the restructuring. And what's really refrustrating for people is it has promised timeline and debtline over and over again and it has failed to deliver on them over and over again. So the next date that we are watching for really is March twenties. It's a court hearing date.

And last time at the court's hearing which has been adjoined to March twenties, every grant had promised the judge that it will present a plan and have creditors support by early March, and we know, we know now is March first, and that is nowhere to be seen. So yeah, those are the key dates that we're watching for right now. And the back up, just let me go back a little bit on this lawsuit that I'm talking about so

what's called is it's a winding up lawsuit. We have seen several developers creditors use this strategy in Hong Kong Core in the past few months. That is, essentially, when the company owes a certain amount of money that has not paid, the creditor can go to court and said this and say, this company owes me debt that is not paying me. I want to plan it to be insolvent. I wanted to go into liquidation, sell its assets, and repaying is dead. So many creditors have taken up this approach.

It's not ideal because if a company actually goes into liquidation, it needs to fire sell its assets, and you know, creditors will get their money. But that is not the result that everyone wants. Someone just wants some of them just wants a better recovery. And so everyone is now in this lawsuit and it has repeatedly adjourned its hearings and delayed presenting a restructuring plant. It keeps telling the Core I'm working on a plan, but it's just not

presenting it. Do we know what's holding things up? Yeah? Actually, so there are a few things that the company is having disagreements with a major group of dollar bond holders over that we have learned from sources UM, so we may get into a bit of litergree details here. UM. The source has told us before that every ground has presented two solutions. The first one is to just extend the debt UM and the second one will require swapping some of the debt into its shares as well as

shares of the Hong Kong listed units UM. And now they have some disagreements over you know, the equity valuation of those shares UM, which you know, if the company is more bullish on its own share valuation whereas if creditors think it's less, it would imply a deeper haircut

for the bondholders UM. So valuation is one thing. We also learned that the company is only willing to offer a small percentage of its stakes in those teamiths, whereas the editors are demanding almost entire Evergrand's entire stakes in those units. So that's another sticking point. There are other things like the the group is actually demanding the company to address is corporate governance issue that we have seen this happening, How do we prevent this from happening again?

So that's among their demands. Those are a few things that they just cannot get on the same page at the moment. And as you mentioned, it's not just local investor, its foreign bond holders as well. Who are we talking about? Are there any big names in there? Yeah, Unfortunately, I'm not sure I can disclose that at the moment, but yeah, you're absolutely right. Um. Evergrand debt is not just held by local creditors. It really has deep implication for China's

onshore financial system. But let's not forget it used to be the largest dollar debt borrower. Like I said, in China, China's a real estate sector. So dollar bonds are held by a lot of global investors, big and small. And the group that I'm talking about here is an ale group of dollar bond holders and they are just some of the big ones that are talking with the company.

But that the company still need to after convincing them, still need to convince is Broader set all of his dollar bond holders at some point to agree on a restructuring plan to really move the progress forward. You mentioned it right down as well, and obviously the company needs to get rid of some of that. What are we talking about, do we have any sense at this point of how much of a haircut credits might be taking hire That unfortunately is not very clear at the moment yet. Okay,

and so what will happen if Everground loses its lawsuit? Yeah, that's the scary thing. As I was saying, a lot of creditors have been threatening with such lawsuits to get the company to come to the negotiation table. And I would say in Everground's case, it has definitely worked because the company's restructuring did pick up pace after that winding up lawsuit was filed. But we have started to see some developers actually getting the winding up order from Hong

Kong court and facing liquidation. So that's what's going to happen to Evergrants if they lose this lawsuit, the court can appoint a liquidator, comes these all of its off score assets and sell them and use them to repay its credit tres. Another thing here is you know if Evergrand doesn't want to lose this lawsuits. It's also important, also important because the company's shares and this unit shares

have been on pause. They have been halted since March twenty twenty two because it could not deliver is earnings results, but it has seen them been on pause, and to get this lawsuit dismissed or result is among many conditions for it to resume his shares trading again. And if the shares do not trade for over eighteen months, it could be delisted from Hong Kong Stock Exchange. So that's another thing that you know, the company needs to watch

out for. So it's obviously a huge story in China right now, and it also involves a man who was once the richest in the country and one of the most influential people. You know, he was across business, across politics, and worth about forty two billion dollars at one point. Can you give us a bit of a flavor of that,

please sell us? Yeah? Sure, So Hui Kayan, like you were saying, was once China's one of China's richest and most influential business meant he used to be worth forty two US billion US dollars you were men mentioning, and now there's lost ninety three percent of that wealth he used. He also was very politically stabby. He has been part of the political advisory body since two thousand and eight, but now he's no longer part of China's People's Political

Consultive Conference anymore. So he's lost as wealth and he's a political status. And in terms of the ripple effect from this whole Evergrand situation, what are the bigger implications for China's credit markets? I mean, has the default at this scale scared away foreign investors? Are they are the developers now shut out of capital markets? Yeah? Absolutely, both of those things. So for one, a lot of developers

cannot come to the market now. It is, like I said, not Evergrand alone, because this is part of the making of China's crackdown on the whole sector. But Evergrand being the highest profile casualty is no doubt contributing to a large part of this. And as I was saying, the sectors no ball into require amount of default. What that has led to is the yields in the secondary market has become way too high. So they have not come down a bit to around sixteen percent that previously reached

almost thirty percent. And that means if issuers want to come to the primary market to borrow new debt, they would need to pay that much or even more to have an edge over the secondary market. And that is just way too much, you know, way too expensive for borers to come to this market again. So this sector really used to be dominating, not just China, about Asia's whole dollar bond issuance, and has shrunk a lot in

this past year. So that's part one that is issuers are shot out of the market, and another one is just yeah, like I said, there are a ton of defaults and unresolved debt issues, and people are watching out for these restructurings and watching to ever Grand because that is led by government's efforts right now and suport looking for a clue of how the government wants to resolve all of these issues. Okay, that's very interesting. Investors in

these situations they often have quite a short memory. They you know, they take a hit, they move on, they come back because they want to invest in a huge economy like China. You do we really think that Evergrand is going to leave a lasting impression that there's going to be something that China is not going to bounce back from. That's hard to say. Today. Actually we're seeing China's property market, um, I mean in terms of sales are finally bounding back a little bit. Um. So that

is the latest data from February. However, for dollar bond investors, I believe they will they will carry to his memory with that's for how long, I'm not sure, but you know, for one, if the companies really also depends on the company's restructing plan. Right, is just going to extend its debt for twelve years as we had reported previously, than keep pointing to wait out those twelve years until they can finally get their money back, And I bet they're

going to seem a matter of memory. Alice One of Bloomberg News, thank you so much for joining us. This is a fascinating story with broad implications, and we look forward to reading all of your scoops on the Bloomberg terminal and of course at Bloomberg dot com. Thank you Switching gears here a bit. As I mentioned earlier, we are very fortunate to have Mary Ellen Olsen from Bloomberg Intelligence,

also based in Hong Kong. Now, when we met a few weeks ago, Mary Ellen, we talked a bit about India, which has been in the news quite a bit because of a Danny. Just to catch everyone up a bit. Danny is an Indian ports to renewable energy conglomerate that was accused of accounting fraud and stock manipulation and experienced a big route in its stock hand bond prices. There's a lot of concern now over whether it can repay

the debt. The news has really shone a light on all Indian companies, the way they're structured and how they run. But we're not here to talk about Donnie. Instead, we're going to dig into another big Indian firm, Vedanta Resources, which is a getting a lot of attention and involves a highly also involves a highly leveled tycoon. So to start with, I've got to ask Mary Ellen, is this

the next to Danny we're looking at here? Well, I think there's some similarities between the two companies, but I think Vedanta is starting from a much different point than where we saw a Donnie's start. A Donnie's Sports company is rated in the investment grade category in the low triple B space, and of course Vedanta is rated in the low single B space. So I think we can expect that it has more governance issues, more liquidity and

financial risk than a Donnie to start with. So, just to kind of set the state, I think it's starting off from a weaker position I think the similarity similarities between the two companies, however, do raise some some flags. And I think the key similarities would be that they're both you know, run by the promoter, which directs the

you know, the direction that the company goes in. They both have very complex corporate structures and that can limit transparency and also to some extent give rise to information risk. And finally, the companies both have a lot of debt and have used debt to grow their businesses. So I think that in general there is some flags that can be seen across both of the names. So we just to back up. Let's let's talk about the company itself. For those not familiar, what is Vadanta Resources? What do

they do? And you know why why why do we care about them in terms of like the you know, the Indian and the Asian commodity market. So the Danta is a mining company. Its key industries are oil, aluminum, and zinc. Those are what comprise the bulk of its EBIATA generation. And I think that we care about them in the US dollar bond space is because they've been

a heavy dollar bond issuer. At the moment, the holding company has about five billion in dollar bonds outstanding, and it does have liquidity risks, and people are worried about whether or not they have the resources to pay the debt, especially given the fact that their their debt maturity profile

is relatively short term. But the metals that you mentioned and the set that they're in generally, I mean, that's been a good, good one over the last few years, right, the commodities have rallied, the metals have been in demand, there's been a big boom. Why why would this company not do well well? I think there's a story. Obviously, with all high yield companies, I think there's a story. And the story with this company really goes back to

its corporate structure. The US dollar bond bower and obligore is Vedanta Resources, so that sits at the top of the corporate structure. But it's not an operating company. So even though it has all that, it doesn't have any operations itself. So it relies on the upstream of dividends

from its subsidiaries. So its core subsidiary is Vedanta Limited and it owns about seventy percent of that and Vedanta Limited owns one hundred percent of the oil and gas assets and they account for about twenty five percent of EBIDA, and Vedanta Limited owns sixty five percent of the zinc assets, which account for about fifty percent of EBIDA, and then it owns about fifty one percent of the aluminum company,

which is about fifteen percent of EBIDA. So you've got to keep in mind that all these subsidiary companies they also have debt and they also have you know, capex needs that they need to fund. So what's left over is then you know, what can be upstreamed to eventually to the Danta resources to cover the obligations there. So that complexity creates a problem in terms of the efficiency of you know, cash flows throughout the corporate structure to to repay all of the obligations. So can it means

repents and how does it do that? Well, Um, you know, it has some levers that it can pull. It's it's primary level lever has been over the past several months, the dividend upstreams, particularly from the zinc subsidiary, which is cash risk rich. Um. In addition to that, it has some nominal fees that it can assess on its subsidiaries and it can bring those moneys up to the holding company, and of course it can also rely on new funding

from from banks, either domestic banks or international banks. So those are the key levers that they're looking at at

the moment. They actually came out today saying that they were looking at raising about one point eight billion from banks and were in advanced negotiations in that regard at the moment, although they did not really name any counterparties or disclose any time frames that they're looking for foreign investors in that they didn't really specify the banks, but the sense is that some of that would come from

domestic and they're also looking at some international banks. Okay, but based on the yields right now in the dollar market, would they have too they be able to get an affordable rates on that that remains to be seen. Um. Certainly their you know, their bonds themselves are yielding in the double digit territory, and press reports a couple of weeks ago did indicate that the potential funding for the company was was quite high. But previously the company has

shown a willingness to finance at pretty high rates. Back in twenty twenty one, they issued US dollar debt at at about thirteen percent or over so they do show an ability to to bring in funds even if they have to pay high rates. And that yield you mentioned, I mean, to what extent do you think that's influenced by the situation at A Donnie at the moment, you know,

I don't. I don't think that there has been a huge impact just because the starting rates, um, you know, pre the Hindenburg report on a Donnie, we're pretty high. You know, right now they're in the double digits. They were there then as well. Where I've seen more of a crossover impact probably would be on the stock prices, which took a dive just this week. They were down I think up to twenty no, about ten percent this week, and that kind of coincided with all this rhetoric coming

out comparing Vedanta and Donnie. And of course here before the stockholders had been receiving good dividends because of all these upstreams. But I think this idea that there's a contagent risk feeding into Vedanti helped push the stock prices. So I've seen more of an impact probably in the stock than in the bonds. That at least I can discern. Okay, they already have a very low credit rating, right, do

we expect more downgrades in the next few weeks. Well, so, at the moment, the SMP is the only company that officially rates Vedanni, and they rate it at B minus and they have a stable outlook. Moodies did rate the company, but Danta reportedly withdrew the contract after Moodies downgraded them to the triple C category on liquidity risks, and SMP has said that the rating could come under pressure if they don't make progress in getting some financing in the

door in a timely fashion. And as a rule of thumb, I think the rating agencies like to see you an answer for how they're going to repay debt anywhere from three to six months before the debt matures, so they're coming up to that benchmark. They do have bonds that mature in April and May this year, so the agent

and then again in January twenty twenty four. So I would expect that in the next couple of weeks the rating agency would have to follow up on its indication about where it sees the financing coming from and making a decision about whether or not they need to change the rating. One of them has a triple C that's um. You know, if you read the small print of the rating agencies reports, that implies very high probability of default.

Is that what we're expecting? Well, I think that that's you know, again, this is a high yale company, and there's always stories with these companies, and Danta has been here before. It has had a triple C rating before and has pulled out of it. And I think, you know, at the moment, the company is still saying that it is speaking to banks, and I don't think that we can totally discount that even though they have not really

produced anything concrete at the moment. I think one of the things that's in the company's favor is that they do have some time to play with. They can upstream dividends, and SMP confirm that in their view, they could probably fund the debt repayments through the end of June through these dividend upstreams and other fees that the company could get in. So even if SMP does change its outlook or it's rating on the company, it still has some time to play with before there would be a danger

of a default. And given the company's pass track record in you know, coming up with a solution. I think that that would be what's on everybody's mind. What can they do to turn this around in the absence of additional bank funding. But it does seem at the moment that that is what they're focused in on and what they're hoping to target in the near term. Okay, but they could also sell some assets right when they have

things like Zinc International. They've been trying to get rid of what's going on there, so that so the sale of Zinc International would be would have a profound and material impact on their liquidity if if it were to happen, and it does look as though that's being sidetracked at

the moment due to government objection. So what's happening is Zinc International are the African assets of um Vedanta Limited, which which are wholly owned, and they are trying to sell those assets to their sixty five percent owned Hindustand Zinc, which is the cash which company, and that would in effect help transfer or pull about three billion out of Hindustan Zinc up to the Vedanta Limited level, which could then be upstreamed more readily to the holding company to

help support its liquidity needs, so that that actually would have been a helpful transaction. But again it does look as though the government has objected to it, and even Fidanta itself has kind of stepped back and said that they need to get shareholder approval in order for that transaction to go forward. And the government is a shareholder, why does the government object? I think there's a couple of different things that have come out in the press.

In general, I think there's been some concern on the valuations that perhaps they're too high. I think also, you know, it's a related party transaction and you know, the shareholder interest, you have to make sure that they're being you know, wholly met. From my perspective, the transfer of the Zinc International assets, you know what, they do require some CAPEX investment for growth, so that could be a drag potentially

on the consolidated company. And the final consideration is just the government itself, the Indian government, it has divestment targets to meet under its budget and it was planning on divesting a piece of Hindustan Zinc. When the announcement came out from Vedanta about the asset sale, the share price did drop on Hindustan Zinc, so that also could have

affected the government's view of the transaction. So those are some of the things that you know, have kind of been in the press or I've been thinking about about why the government could be objecting. Okay, you mentioned levers at the beginning of There any other levels that the company can pull I think I think you mentioned one in terms of asset sales. They have spoken in the past about potentially selling down pieces of their steel business

or even some of their copper business. But the question there is on you know, timeliness, you know, because those things may not happen within a time frame that could meet their liquidity needs. Previously they talked about selling down pieces of their listed companies, but you know, that could be more problematic in terms of you know, uh, opening up new shareholders, which could create some some leakage from

dividend distributions. And another avenue would be intercompany loans, although the government but the company has said that they're not really interested in doing or what wouldn't do those anymore previously and some of the calls that they've had, But um, I suppose that could be another avenue. You mentioned the very high yields that they're paying. Do you think investors are being compensated for the risks here. Well, I mean, I guess that there's a you know, a right price

for for every every Bondum. Certainly, I think that they're factoring a lot of the risks, and I think that at the moment, you know, there's there's plenty of people out there that are on both sides of the fences about whether or not the government is going. Um. Sorry I keep saying the government the company can pay or not pay m But I guess that remains to be seen. You know, if they if they come through with the liquidity, you know, the financing, and we're able to resolve their

liquidity issues, then some people will benefit for sure. And You've been looking at this company for a long time, and I'm glad, I'm glad you raised the point that they are not. This is not the first time that they've been in the situation. You know, the owner has faced the liquidity woes in the past. He has always managed to get the money and pay on time. Um,

what's different about it this time around? I think the big difference, um, would be that there's probably a few more doors that are closed so that they do have to in the near term, perhaps lean a little bit more heavily on the banks um and I guess I'm talking about just market access. Given the state of the the bond market at the moment, especially for high yeld issuers, we have not seen a lot of issue WinCE and it doesn't seem a likely avenue for Vedanta to refinance

in at the moment. We already talked about, you know, HCl. I think that that, you know, gave a lot of people a lot of hope, but that avenue seems to have been shut down by the government objection. And previously you had a situation where they were hoping to privatize Videnta Limited. They've been down that road and have increased their stake, but I'm not sure that you know, they would renew that at any time in the near term.

So it seems like they have a few more doors that have closed on them, at least unless unless they're able to come up with some new ideas. Okay, great, we'll definitely be watching with a lot of interest. We'll read your analysis. Have it done to in All Things Asia Commodities and thank you how much, Mary Ann Mary Ellen Olson of Bloomberg Intelligence. You can read all of Mary Ellen's analysis on the Bloomberg Terminal, and thanks again to Alice Huang from Bloomberg News. Read all of her

scoops on the terminal and at Bloomberg dot Com. Definitely keep an eye on that evergrand story, Alison. Her team will continue to break a lot of news there over the coming weeks. I'm James Crombie. It's been a pleasure having you. See you next week on the Credit Edge.