Evergrande’s boss needs a lot of new friends now

In the past, China Evergrande Group has always been able to wiggle out of trouble. In turbulent times, billionaire founder Hui Ka Yan would turn to his tycoon friends to prop up his stocks and bonds. The persistent support they’ve provided — buying up Evergrande debt — is why the developer is also Asia’s largest dollar junk bond issuer.
Hui’s pals were at it again earlier this week. As the real estate developer’s bonds tumbled to record lows, CST Group Ltd said in a filing that it had bought $11 million worth of Evergrande bonds on the open market. Billionaire Cheung Chung Kiu — one of Hui’s buddies in what’s called the Big Two poker club — has a stake in CST. Last September, during another credit crunch, the investment firm bought Evergrande bonds as well, helping to stabilise a market that had grown jittery over another bad turn in the property developer’s fortunes.
Friends may not be enough now. This credit crunch is a lot more severe. With Evergrande’s 2025 dollar bond trading at only 50 cents on the dollar, it’s clear investors are already pricing in a potential default. Furthermore, fresh revelations this week have called into question how much cash Evergrande really has on hand to cover bonds that are coming due. The endgame is near.
First, Evergrande is going to have a harder time converting apartment sales to cash. Like other property developers, it’s benefitted from a practice common in China called pre-sales: Consumers pay the full price of homes before they are built, handing over a lump sum and mortgage borrowing. In theory, there’s an escrow account to ring fence client money; but, in practice, developers have often tapped into these payments early, especially when they don’t have any other channels for funds.
Shaoyang, a fourth-tier city in Hunan province, called out this practice. The city government said it had halted sales at two of Evergrande’s residential projects. Out of 290 million yuan (nearly $45 million) in Evergrande home sales made this year, only 106 million yuan appeared in the designated escrow account, the city complained. Shaoyang reversed its decision only after Evergrande wired 128 million yuan into the account and promised the rest when banks release their mortgage loans. In other words, Shaoyang said: Put the money where it belongs, or stop selling property.
Evergrande’s certainly not the first to have trouble with pre-sales. Last year, distressed luxury villa developer Tahoe Group faced pressure from hundreds of pre-sale customers who feared projects in Beijing and Shanghai might never be completed.
Now, Evergrande’s liquidity issues are affecting its customers in Hong Kong. HSBC Holdings Plc, Hang Seng Bank, the Bank of China’s Hong Kong unit, and the Bank of East Asia stopped providing mortgages to people who
want to purchase Hui’s yet unfinished residential developments in the city.
If other cities in the mainland emulate Shaoyang, Evergrande will have to finish its projects quickly, and deliver the keys to consumers before getting paid.

—Bloomberg