Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain non global business so you
Speaker 1: can invest better across the Pacific rim. I'm Tom Corbett
Speaker 1: in Hong Kong.
Speaker 2: And I'm John Lee. Evergrand has become the mother of
Speaker 2: all casualties in China's real estate crisis, crumbling under the
Speaker 2: weight of its own debt and leaving home buyers investors reeling.
Speaker 1: The latest twist in the Everground saga came this week
Speaker 1: when a Hong Kong judge ordered the property giant carved
Speaker 1: Up liquidated, more than two years after it first defaulted
Speaker 1: on a bond payment.
Speaker 2: The judge's ruling is a far crime from closure for
Speaker 2: Evergrand's creditors, who could now face a long and complex
Speaker 2: road that may not even end in recovery.
Speaker 1: Can Evergrand's bond holders ever be made whole? And what
Speaker 1: will it take to restore confidence in China's property market?
Speaker 1: And why might the worst not yet be over?
Speaker 2: Let's find out with two Bloomberg Intelligence experts. Christy Hung
Speaker 2: is senior equity analysts covering China real estate.
Speaker 1: And Daniel Fan is senior credit analyst covering China property developers.
Speaker 1: Christy and Dan, welcome back to Asia Center EC.
Speaker 3: Thanks for having us.
Speaker 4: Good to be here.
Speaker 2: Christy, why is the quote ruling so significant for Evergrand?
Speaker 3: I think we are two years into Evergrand saga, and
Speaker 3: I think it's latest liquidation also shows us how, you know,
Speaker 3: China is very far from resolving the crisis for his
Speaker 3: housing market and we have seen, you know, waves and
Speaker 3: waves of policy stimulates so far still failing to revive
Speaker 3: housing market sentiment on the ground.
Speaker 2: And Daniel, do you think foreign investors, in particular offshore
Speaker 2: creditors can get recourse to any of the assets Evergrand
Speaker 2: holds in China.
Speaker 4: I think it's not that easy. I think the way
Speaker 4: the liquid Data is trying to do is trying to
Speaker 4: not to touch the onsore cost system. So basically, they
Speaker 4: in my in my mind I don't have all the information,
Speaker 4: they try to take over the Hong Kong LISCO and
Speaker 4: try to collaborate onsore and upstream whatever they are able
Speaker 4: to upstream after like resolving all the onsore that issue.
Speaker 4: So instead of an outright liquidation putting all the assets
Speaker 4: for like you say, our sales, they're going to maintain
Speaker 4: the onsore operations and then cares out over a longer
Speaker 4: period of time to avoid all the legal complexity and
Speaker 4: possible damages. I think that is the way to do it.
Speaker 4: But if you look at the bond price, actually it's
Speaker 4: one to two cents. It's basically reflecting the two listing
Speaker 4: company that evergrant has that equity stay in. That's the
Speaker 4: market value of the two subsidiaries. I think there's something
Speaker 4: Liquidata may able to do. There are some transactions which
Speaker 4: were not clear that the holding company and the subsidiary
Speaker 4: have done in the past. They may be able to
Speaker 4: recoup some of that money, but it all depends on
Speaker 4: where the money's gone.
Speaker 2: It's importantly you believe that the mainland operations will still continue,
Speaker 2: the still build and complete houses.
Speaker 4: I think it's kind of a more practical way to
Speaker 4: do it otherwise, because the Chinese government always emphasized home delivery.
Speaker 4: If you're able to maintain the onso operation, I think
Speaker 4: it could be a better way because it's very difficult
Speaker 4: to find a buyer for the stress as in these days.
Speaker 1: Mainland China could always ignore the Hong Kong Judges ruling
Speaker 1: if it chooses to go that route. Christy Hony and
Speaker 1: Daniel Fan what does that do for bondhol lose Where
Speaker 1: does it leave them?
Speaker 3: Think about the claims of different stakeholders. We have every
Speaker 3: grand suppliers who need to be paid before they would
Speaker 3: proceed with construction of the projects. And then we have
Speaker 3: home buyers who are demanding their presole homes to be completed.
Speaker 3: And then we have creditors from on shore banks, trusts, bondholders.
Speaker 3: In the offshore market, we have bondholders and equity investors.
Speaker 3: And I think then the question is would there be
Speaker 3: any government intervention to the hierarchy of the claims for
Speaker 3: every grand's case. Apparently the government's priority would be to
Speaker 3: complete presto homes and maybe to pay the suppliers bill
Speaker 3: on shore. And I think the way this is going
Speaker 3: to be handled is going to impact confidence for especially
Speaker 3: foreign investors on Chinese entities.
Speaker 4: Yeah. I just in addition to what CHRISTI mentioned, the
Speaker 4: way they are doing it is trying not to touch
Speaker 4: the onsore bankruptcy system. I think they're doing it in
Speaker 4: a more practical way as Christian Mansuin or the priority
Speaker 4: claims ahead of short predators. So yeah, I think the
Speaker 4: Regon Agency mentioned about subordination risks, and this has always
Speaker 4: been the case.
Speaker 1: Christy Dan, how do you see this liquidation order from
Speaker 1: the Hong Kong judge shaping sentiment and perceptions of foreign
Speaker 1: investors when it comes to investing in China.
Speaker 3: I think it matters, given the impact is going to
Speaker 3: have on the perception of foreign investors. You know, how
Speaker 3: China is going to handle the legal rights of Everigrant's
Speaker 3: off shore bond holders might be interpreted as signs on
Speaker 3: whether the country is backpeddling on its opening up of
Speaker 3: its capital market. If Hong Kong listed Chinese entities like
Speaker 3: Everygrant will struggle with the ESSSS in China. It might
Speaker 3: also impact Hong Kong's role as a fundraising hub for
Speaker 3: Chinese corporates.
Speaker 2: And Daniel, what signal does this turn of events sent
Speaker 2: to Evergrant's foreign bondholders and what does he say about
Speaker 2: the risks of investing in China.
Speaker 4: I think the risks of investing in China is like
Speaker 4: many other ed markets in the past. We have seen
Speaker 4: similar cases in Indonesia where like foreign creditors when they
Speaker 4: try to make their claim, you need to go through
Speaker 4: the local cost and the local law, which goes back
Speaker 4: to the question of structurals of ordination. I think the
Speaker 4: key thing about this situation is basically, first is the
Speaker 4: macro economic situation in China, so in the book market
Speaker 4: structures of ordination is not an issue. And the other
Speaker 4: thing is more about government's policies. Chinese government used to
Speaker 4: be wearing pro business, so credit risks and subordinates and
Speaker 4: risks are less of a concern. But then those are
Speaker 4: the two key factors affecting foreign investors' mindset when they
Speaker 4: think about investing in China.
Speaker 1: And where do the mortgage holders stand? We have thousands
Speaker 1: and thousands of home buyers who paid good money for
Speaker 1: homes that are still sitting unfinished to this day. Where
Speaker 1: do they stand in the pecking order of creditors and
Speaker 1: claims on assets?
Speaker 3: Yeah? So evergrand has over six hundred billion of PRESO
Speaker 3: homes pending delivery as of mid twenty twenty three, and
Speaker 3: they're winding up order. I think it's going to do
Speaker 3: another blow to confidence in China's housing market, which is
Speaker 3: already very fragile to begin with. Think about how this
Speaker 3: will likely be a drawn our liquidation and how many
Speaker 3: more years Evergrant's home buyers will have to wait before
Speaker 3: they can see the preso homes being completed. I think
Speaker 3: this is going to put a big question mark on
Speaker 3: the part of Chinese households, asking, you know, can I
Speaker 3: ever trust preso housing projects in China by a private developer.
Speaker 3: In fact, we're already seeing Chinese home buyers they're pivoting
Speaker 3: to secondhand homes because what you see is what you get.
Speaker 3: But Priso Holmes is the one that's contributing to China's GDP,
Speaker 3: because that's involving new constructions.
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Speaker 1: I read some published accounts that the Hong Kong Judge
Speaker 1: was a bit frustrated at the pace of progress In
Speaker 1: all this, didn't Evergrant's management show any interest in promoting
Speaker 1: or putting forth a restructuring plan or do you think
Speaker 1: they were just throwing in the towel and just washing
Speaker 1: their hands of it.
Speaker 4: I think they are trying to arrive in an agreement
Speaker 4: at the end of the day. I think at these
Speaker 4: company's the biggest shareholder is still the funder and the chairman.
Speaker 4: Their equity state is in it. But at the same
Speaker 4: time their hands are tied by what's happening onsore and
Speaker 4: also by the complexity of their death structure. So I
Speaker 4: think probably that proposal is the best they're able to
Speaker 4: come out. Obviously the other side also want more, so
Speaker 4: I think at the point they are not really able
Speaker 4: to arrive at some point of like would think that's
Speaker 4: are feasible. I think that's the key issue, and I think.
Speaker 3: The slow pace of the restructuring process is not unique
Speaker 3: to everygrant you know. Evergrant's liquidation could serve as a
Speaker 3: warning to its peers. If we look at the nine
Speaker 3: in solten traffic developers that we cover so far, only
Speaker 3: two have completed their restructuring, so there are others that
Speaker 3: are also in a state of limbo. And it's not
Speaker 3: just Evergrand, but hopefully the verddic for Everygrant could motivate
Speaker 3: the others to f finally get their X together and
Speaker 3: move toward a dead deal.
Speaker 2: And Christy, that begs the question which developer could come next?
Speaker 3: So of the developers that we're covering or outside of
Speaker 3: our coverage, developers that are more prominent Kaiser and Logan
Speaker 3: are next to have their winding up hearing in February.
Speaker 3: And for developers that we cover, we also have she Mao.
Speaker 3: It has defaulted on its offshore bonds for eighteen actually
Speaker 3: nineteen months now, you know, for everywhere is about two years,
Speaker 3: so Simao is around nineteen months. And this also has
Speaker 3: dragged on for a long time for other developers. So
Speaker 3: for this process, you know, the longer it drags on,
Speaker 3: the bigger exposure that the companies might have to potential
Speaker 3: litigation risk if creditors are impatient with the process.
Speaker 1: And Daniel Fan Christy Hung give us a little perspective
Speaker 1: in some bigger picture perspective here, how would you characterize
Speaker 1: the judges order against the broader backdrop of this entire
Speaker 1: Everground property drama. Is this carving up of the cadaver
Speaker 1: of Evergrond so to speak? Is this the final step,
Speaker 1: you know, the sword and paling the wounded beast? Or
Speaker 1: is it just one more step in an endless legal
Speaker 1: drama that's going to drag on for years.
Speaker 3: From my perspective, I'm also looking forward to the revelation
Speaker 3: from the liquid Data's investigations of Evergrand's books, as in
Speaker 3: what actually went wrong inside the company, you know, where
Speaker 3: they're more acts of frauds than the markets that we
Speaker 3: are aware of, And what happened to the money that
Speaker 3: is supposed to be insider as crow A kant to
Speaker 3: complete the projects? Where did they go? And we have
Speaker 3: many questions that we are still seeking answers for. And
Speaker 3: I think the liquidation process could give us some insights
Speaker 3: and also perhaps insights to the authorities on how to
Speaker 3: better regulate China's housing sector in the longer run.
Speaker 2: You made an interesting point there. Evergrand is seen as
Speaker 2: a badly run company, right like a company that fell
Speaker 2: on its own sword. It branched out to making electric vehicles,
Speaker 2: it earned the football team, It really fueled its growth
Speaker 2: with debt. Is that right? Or is this, you know,
Speaker 2: representative of the whole sector.
Speaker 3: I think Everygrand is unique. It was at one point
Speaker 3: the biggest Chinese developer by home sells, but it's also
Speaker 3: the most leveraged. It has embarked on this period of
Speaker 3: taking excessive debt to drive its land bank expansion. On
Speaker 3: one part, issues with his cash flow management. You know,
Speaker 3: when the housing market sentiment quickly slows, that is going
Speaker 3: to impact its home seals and its ability to repay.
Speaker 3: And it's like a domino that fell. But I think
Speaker 3: at the same time there are also legit questions that
Speaker 3: investors should raise on the company's corporate governance. You talked
Speaker 3: about is in branching out into different investment into energy, vehicle,
Speaker 3: soccer team. And there are also questionable transactions that we
Speaker 3: have seen between Evergrand and its property management units that
Speaker 3: we have seen money missing, and we're looking for some
Speaker 3: more details from the liquidation as to what other areas
Speaker 3: that could have ran wrong in the process.
Speaker 1: When business historians and economists sit down and they write
Speaker 1: their books about the Evergrand saga, what do you think
Speaker 1: they're going to say about it? How will they describe it?
Speaker 1: What lessons are they going to draw?
Speaker 4: I think the lessons is more about why, because to me,
Speaker 4: the China property setup is a highly regulated center. From
Speaker 4: the land acquisition step one. Land price in the often
Speaker 4: process is regulated. When you launch a project is regulated,
Speaker 4: when you try to launch a project at a certain
Speaker 4: price is regulated. Obviously, Evergran has a lot of us
Speaker 4: sort come but I think in a highly regulated environment,
Speaker 4: we need to learn from the past. What are the
Speaker 4: factors contributing to the fact that it allows Evergrand to
Speaker 4: blow from a very small development to the country's largest.
Speaker 4: I think that is the biggest question.
Speaker 3: Yeah, I think it also reveals how the timing of
Speaker 3: the regulation is critical because in twenty sixteen through twenty
Speaker 3: twenty one, China has went through this period of exuberance
Speaker 3: growth in its housing market. But if we look at
Speaker 3: Everywhe's balance sheet, you know it's not that tequity. It
Speaker 3: was over three hundred percent at one point, and I
Speaker 3: think it could be argued that regulatory efforts could have
Speaker 3: come in earlier to cool down the market and try
Speaker 3: and help some of these developers the leverage earlier than
Speaker 3: in twenty twenty one when the spirit lines came in
Speaker 3: and the bubble spot. The downturn came very drastically, and
Speaker 3: what happened with Every Grand spread to a lot of
Speaker 3: other private developers and the damagers to confidence was done
Speaker 3: to the market in a way that you know, we
Speaker 3: are two and a half years into the crisis, and
Speaker 3: right now it's like, no matter how much the government
Speaker 3: is trying to push our more policy support. The market
Speaker 3: is not reacting, home sales is not picking up, and
Speaker 3: China is now in a very difficult situation with its
Speaker 3: housing market when the damagers to confidence is very hard
Speaker 3: to be undone.
Speaker 2: And Christy talking about confidence, This court ruling could not
Speaker 2: have come at a worse time. China's stock markets have
Speaker 2: been reeling, the authorities have been trying to prop up
Speaker 2: the equity markets. Do you think this is a big
Speaker 2: blow to authorities efforts?
Speaker 3: I think just in the recent weeks, we have seen
Speaker 3: a wave of stimulus measures. You know, on Thursday we
Speaker 3: have the government coming out saying we are going to
Speaker 3: support commercial property loans from developers. On Friday is talking
Speaker 3: about supporting the financing of property projects, and then on
Speaker 3: Saturday we have Guangzho rolling back its home purchased cubs.
Speaker 3: So all these steps taken to try and prop up
Speaker 3: the housing market in China, and yet we have this
Speaker 3: liquidation from Everygrand and it's like boom reminding people about
Speaker 3: the health of the China real estate industry and reminding
Speaker 3: people to be cautious about private developers. Given you know,
Speaker 3: this is the fate of Everygrand, which is the first
Speaker 3: one to default On is dead, but we still have
Speaker 3: a lot of other developers that are suffering from non
Speaker 3: payments and not anywhere near to reaching a restructuring deal.
Speaker 3: And it means that you know, we're seeing this drawn
Speaker 3: our process of recovery for the sector, and that's still
Speaker 3: a question mark in a lot of whome buyas mind
Speaker 3: thinking can I invest in a property right now in China?
Speaker 2: Daniel? Last question to you, what is evergrand saga going
Speaker 2: to mean for the high yield issuance market?
Speaker 4: Oh, it's actually very damaging if you look at what
Speaker 4: happened in terms of issuance or the issuance market. Is
Speaker 4: that so meaning that they're not able to get any
Speaker 4: financing also and Onsolt they get limited with financing. And
Speaker 4: also if you look at the financials, I would say
Speaker 4: it's worse than like two thousand and eight crisis definitely,
Speaker 4: and probably worse than the Asia financial crisis when you
Speaker 4: look at the numbers from a bottom up perspective. So
Speaker 4: meaning that this setter is not going to recover any
Speaker 4: time soon. Maybe it would become like a much smaller
Speaker 4: sector in the years ahead.
Speaker 2: Okay, Dan, you might have to expand your coverage there
Speaker 2: going forward.
Speaker 4: Thank you.
Speaker 1: We've been discussing ever Ground and the latest chapter in
Speaker 1: China's property crisis with Christie Hung, a senior equity analyst
Speaker 1: covering China properties, and Annual Fans senior credit analysts covering
Speaker 1: China real estate, Christy and Dan. The drama continues to
Speaker 1: unfold and we look forward to tracking developments as they
Speaker 1: happen and keeping in touch again.
Speaker 3: Thank you, Tom, our pleasure to be here.
Speaker 4: Thank you everyone.
Speaker 1: I'm Tom Corbett in Hong Kong.
Speaker 2: And I'm John Lee. This podcast was produced by Clara
Speaker 2: Chan and you've been listening to the Asia Centric podcast