WEBVTT - Evergrande’s Final Act to Leave Investors Hanging

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<v Speaker 1>You're listening to Asia Centric from Bloomberg Intelligence, the podcast

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<v Speaker 1>that pulls back the curtain non global business so you

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<v Speaker 1>can invest better across the Pacific rim. I'm Tom Corbett

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<v Speaker 1>in Hong Kong.

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<v Speaker 2>And I'm John Lee. Evergrand has become the mother of

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<v Speaker 2>all casualties in China's real estate crisis, crumbling under the

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<v Speaker 2>weight of its own debt and leaving home buyers investors reeling.

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<v Speaker 1>The latest twist in the Everground saga came this week

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<v Speaker 1>when a Hong Kong judge ordered the property giant carved

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<v Speaker 1>Up liquidated, more than two years after it first defaulted

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<v Speaker 1>on a bond payment.

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<v Speaker 2>The judge's ruling is a far crime from closure for

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<v Speaker 2>Evergrand's creditors, who could now face a long and complex

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<v Speaker 2>road that may not even end in recovery.

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<v Speaker 1>Can Evergrand's bond holders ever be made whole? And what

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<v Speaker 1>will it take to restore confidence in China's property market?

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<v Speaker 1>And why might the worst not yet be over?

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<v Speaker 2>Let's find out with two Bloomberg Intelligence experts. Christy Hung

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<v Speaker 2>is senior equity analysts covering China real estate.

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<v Speaker 1>And Daniel Fan is senior credit analyst covering China property developers.

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<v Speaker 1>Christy and Dan, welcome back to Asia Center EC.

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<v Speaker 3>Thanks for having us.

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<v Speaker 4>Good to be here.

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<v Speaker 2>Christy, why is the quote ruling so significant for Evergrand?

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<v Speaker 3>I think we are two years into Evergrand saga, and

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<v Speaker 3>I think it's latest liquidation also shows us how, you know,

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<v Speaker 3>China is very far from resolving the crisis for his

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<v Speaker 3>housing market and we have seen, you know, waves and

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<v Speaker 3>waves of policy stimulates so far still failing to revive

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<v Speaker 3>housing market sentiment on the ground.

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<v Speaker 2>And Daniel, do you think foreign investors, in particular offshore

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<v Speaker 2>creditors can get recourse to any of the assets Evergrand

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<v Speaker 2>holds in China.

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<v Speaker 4>I think it's not that easy. I think the way

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<v Speaker 4>the liquid Data is trying to do is trying to

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<v Speaker 4>not to touch the onsore cost system. So basically, they

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<v Speaker 4>in my in my mind I don't have all the information,

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<v Speaker 4>they try to take over the Hong Kong LISCO and

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<v Speaker 4>try to collaborate onsore and upstream whatever they are able

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<v Speaker 4>to upstream after like resolving all the onsore that issue.

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<v Speaker 4>So instead of an outright liquidation putting all the assets

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<v Speaker 4>for like you say, our sales, they're going to maintain

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<v Speaker 4>the onsore operations and then cares out over a longer

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<v Speaker 4>period of time to avoid all the legal complexity and

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<v Speaker 4>possible damages. I think that is the way to do it.

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<v Speaker 4>But if you look at the bond price, actually it's

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<v Speaker 4>one to two cents. It's basically reflecting the two listing

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<v Speaker 4>company that evergrant has that equity stay in. That's the

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<v Speaker 4>market value of the two subsidiaries. I think there's something

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<v Speaker 4>Liquidata may able to do. There are some transactions which

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<v Speaker 4>were not clear that the holding company and the subsidiary

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<v Speaker 4>have done in the past. They may be able to

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<v Speaker 4>recoup some of that money, but it all depends on

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<v Speaker 4>where the money's gone.

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<v Speaker 2>It's importantly you believe that the mainland operations will still continue,

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<v Speaker 2>the still build and complete houses.

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<v Speaker 4>I think it's kind of a more practical way to

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<v Speaker 4>do it otherwise, because the Chinese government always emphasized home delivery.

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<v Speaker 4>If you're able to maintain the onso operation, I think

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<v Speaker 4>it could be a better way because it's very difficult

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<v Speaker 4>to find a buyer for the stress as in these days.

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<v Speaker 1>Mainland China could always ignore the Hong Kong Judges ruling

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<v Speaker 1>if it chooses to go that route. Christy Hony and

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<v Speaker 1>Daniel Fan what does that do for bondhol lose Where

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<v Speaker 1>does it leave them?

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<v Speaker 3>Think about the claims of different stakeholders. We have every

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<v Speaker 3>grand suppliers who need to be paid before they would

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<v Speaker 3>proceed with construction of the projects. And then we have

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<v Speaker 3>home buyers who are demanding their presole homes to be completed.

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<v Speaker 3>And then we have creditors from on shore banks, trusts, bondholders.

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<v Speaker 3>In the offshore market, we have bondholders and equity investors.

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<v Speaker 3>And I think then the question is would there be

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<v Speaker 3>any government intervention to the hierarchy of the claims for

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<v Speaker 3>every grand's case. Apparently the government's priority would be to

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<v Speaker 3>complete presto homes and maybe to pay the suppliers bill

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<v Speaker 3>on shore. And I think the way this is going

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<v Speaker 3>to be handled is going to impact confidence for especially

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<v Speaker 3>foreign investors on Chinese entities.

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<v Speaker 4>Yeah. I just in addition to what CHRISTI mentioned, the

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<v Speaker 4>way they are doing it is trying not to touch

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<v Speaker 4>the onsore bankruptcy system. I think they're doing it in

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<v Speaker 4>a more practical way as Christian Mansuin or the priority

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<v Speaker 4>claims ahead of short predators. So yeah, I think the

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<v Speaker 4>Regon Agency mentioned about subordination risks, and this has always

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<v Speaker 4>been the case.

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<v Speaker 1>Christy Dan, how do you see this liquidation order from

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<v Speaker 1>the Hong Kong judge shaping sentiment and perceptions of foreign

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<v Speaker 1>investors when it comes to investing in China.

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<v Speaker 3>I think it matters, given the impact is going to

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<v Speaker 3>have on the perception of foreign investors. You know, how

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<v Speaker 3>China is going to handle the legal rights of Everigrant's

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<v Speaker 3>off shore bond holders might be interpreted as signs on

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<v Speaker 3>whether the country is backpeddling on its opening up of

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<v Speaker 3>its capital market. If Hong Kong listed Chinese entities like

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<v Speaker 3>Everygrant will struggle with the ESSSS in China. It might

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<v Speaker 3>also impact Hong Kong's role as a fundraising hub for

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<v Speaker 3>Chinese corporates.

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<v Speaker 2>And Daniel, what signal does this turn of events sent

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<v Speaker 2>to Evergrant's foreign bondholders and what does he say about

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<v Speaker 2>the risks of investing in China.

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<v Speaker 4>I think the risks of investing in China is like

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<v Speaker 4>many other ed markets in the past. We have seen

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<v Speaker 4>similar cases in Indonesia where like foreign creditors when they

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<v Speaker 4>try to make their claim, you need to go through

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<v Speaker 4>the local cost and the local law, which goes back

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<v Speaker 4>to the question of structurals of ordination. I think the

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<v Speaker 4>key thing about this situation is basically, first is the

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<v Speaker 4>macro economic situation in China, so in the book market

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<v Speaker 4>structures of ordination is not an issue. And the other

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<v Speaker 4>thing is more about government's policies. Chinese government used to

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<v Speaker 4>be wearing pro business, so credit risks and subordinates and

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<v Speaker 4>risks are less of a concern. But then those are

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<v Speaker 4>the two key factors affecting foreign investors' mindset when they

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<v Speaker 4>think about investing in China.

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<v Speaker 1>And where do the mortgage holders stand? We have thousands

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<v Speaker 1>and thousands of home buyers who paid good money for

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<v Speaker 1>homes that are still sitting unfinished to this day. Where

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<v Speaker 1>do they stand in the pecking order of creditors and

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<v Speaker 1>claims on assets?

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<v Speaker 3>Yeah? So evergrand has over six hundred billion of PRESO

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<v Speaker 3>homes pending delivery as of mid twenty twenty three, and

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<v Speaker 3>they're winding up order. I think it's going to do

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<v Speaker 3>another blow to confidence in China's housing market, which is

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<v Speaker 3>already very fragile to begin with. Think about how this

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<v Speaker 3>will likely be a drawn our liquidation and how many

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<v Speaker 3>more years Evergrant's home buyers will have to wait before

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<v Speaker 3>they can see the preso homes being completed. I think

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<v Speaker 3>this is going to put a big question mark on

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<v Speaker 3>the part of Chinese households, asking, you know, can I

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<v Speaker 3>ever trust preso housing projects in China by a private developer.

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<v Speaker 3>In fact, we're already seeing Chinese home buyers they're pivoting

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<v Speaker 3>to secondhand homes because what you see is what you get.

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<v Speaker 3>But Priso Holmes is the one that's contributing to China's GDP,

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<v Speaker 3>because that's involving new constructions.

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<v Speaker 1>You're listening to Asia Centric from Bloomberg Intelligence. By the way,

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<v Speaker 1>I read some published accounts that the Hong Kong Judge

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<v Speaker 1>was a bit frustrated at the pace of progress In

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<v Speaker 1>all this, didn't Evergrant's management show any interest in promoting

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<v Speaker 1>or putting forth a restructuring plan or do you think

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<v Speaker 1>they were just throwing in the towel and just washing

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<v Speaker 1>their hands of it.

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<v Speaker 4>I think they are trying to arrive in an agreement

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<v Speaker 4>at the end of the day. I think at these

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<v Speaker 4>company's the biggest shareholder is still the funder and the chairman.

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<v Speaker 4>Their equity state is in it. But at the same

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<v Speaker 4>time their hands are tied by what's happening onsore and

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<v Speaker 4>also by the complexity of their death structure. So I

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<v Speaker 4>think probably that proposal is the best they're able to

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<v Speaker 4>come out. Obviously the other side also want more, so

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<v Speaker 4>I think at the point they are not really able

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<v Speaker 4>to arrive at some point of like would think that's

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<v Speaker 4>are feasible. I think that's the key issue, and I think.

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<v Speaker 3>The slow pace of the restructuring process is not unique

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<v Speaker 3>to everygrant you know. Evergrant's liquidation could serve as a

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<v Speaker 3>warning to its peers. If we look at the nine

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<v Speaker 3>in solten traffic developers that we cover so far, only

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<v Speaker 3>two have completed their restructuring, so there are others that

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<v Speaker 3>are also in a state of limbo. And it's not

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<v Speaker 3>just Evergrand, but hopefully the verddic for Everygrant could motivate

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<v Speaker 3>the others to f finally get their X together and

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<v Speaker 3>move toward a dead deal.

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<v Speaker 2>And Christy, that begs the question which developer could come next?

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<v Speaker 3>So of the developers that we're covering or outside of

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<v Speaker 3>our coverage, developers that are more prominent Kaiser and Logan

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<v Speaker 3>are next to have their winding up hearing in February.

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<v Speaker 3>And for developers that we cover, we also have she Mao.

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<v Speaker 3>It has defaulted on its offshore bonds for eighteen actually

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<v Speaker 3>nineteen months now, you know, for everywhere is about two years,

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<v Speaker 3>so Simao is around nineteen months. And this also has

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<v Speaker 3>dragged on for a long time for other developers. So

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<v Speaker 3>for this process, you know, the longer it drags on,

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<v Speaker 3>the bigger exposure that the companies might have to potential

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<v Speaker 3>litigation risk if creditors are impatient with the process.

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<v Speaker 1>And Daniel Fan Christy Hung give us a little perspective

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<v Speaker 1>in some bigger picture perspective here, how would you characterize

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<v Speaker 1>the judges order against the broader backdrop of this entire

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<v Speaker 1>Everground property drama. Is this carving up of the cadaver

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<v Speaker 1>of Evergrond so to speak? Is this the final step,

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<v Speaker 1>you know, the sword and paling the wounded beast? Or

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<v Speaker 1>is it just one more step in an endless legal

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<v Speaker 1>drama that's going to drag on for years.

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<v Speaker 3>From my perspective, I'm also looking forward to the revelation

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<v Speaker 3>from the liquid Data's investigations of Evergrand's books, as in

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<v Speaker 3>what actually went wrong inside the company, you know, where

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<v Speaker 3>they're more acts of frauds than the markets that we

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<v Speaker 3>are aware of, And what happened to the money that

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<v Speaker 3>is supposed to be insider as crow A kant to

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<v Speaker 3>complete the projects? Where did they go? And we have

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<v Speaker 3>many questions that we are still seeking answers for. And

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<v Speaker 3>I think the liquidation process could give us some insights

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<v Speaker 3>and also perhaps insights to the authorities on how to

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<v Speaker 3>better regulate China's housing sector in the longer run.

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<v Speaker 2>You made an interesting point there. Evergrand is seen as

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<v Speaker 2>a badly run company, right like a company that fell

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<v Speaker 2>on its own sword. It branched out to making electric vehicles,

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<v Speaker 2>it earned the football team, It really fueled its growth

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<v Speaker 2>with debt. Is that right? Or is this, you know,

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<v Speaker 2>representative of the whole sector.

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<v Speaker 3>I think Everygrand is unique. It was at one point

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<v Speaker 3>the biggest Chinese developer by home sells, but it's also

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<v Speaker 3>the most leveraged. It has embarked on this period of

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<v Speaker 3>taking excessive debt to drive its land bank expansion. On

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<v Speaker 3>one part, issues with his cash flow management. You know,

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<v Speaker 3>when the housing market sentiment quickly slows, that is going

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<v Speaker 3>to impact its home seals and its ability to repay.

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<v Speaker 3>And it's like a domino that fell. But I think

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<v Speaker 3>at the same time there are also legit questions that

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<v Speaker 3>investors should raise on the company's corporate governance. You talked

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<v Speaker 3>about is in branching out into different investment into energy, vehicle,

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<v Speaker 3>soccer team. And there are also questionable transactions that we

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<v Speaker 3>have seen between Evergrand and its property management units that

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<v Speaker 3>we have seen money missing, and we're looking for some

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<v Speaker 3>more details from the liquidation as to what other areas

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<v Speaker 3>that could have ran wrong in the process.

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<v Speaker 1>When business historians and economists sit down and they write

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<v Speaker 1>their books about the Evergrand saga, what do you think

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<v Speaker 1>they're going to say about it? How will they describe it?

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<v Speaker 1>What lessons are they going to draw?

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<v Speaker 4>I think the lessons is more about why, because to me,

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<v Speaker 4>the China property setup is a highly regulated center. From

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<v Speaker 4>the land acquisition step one. Land price in the often

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<v Speaker 4>process is regulated. When you launch a project is regulated,

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<v Speaker 4>when you try to launch a project at a certain

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<v Speaker 4>price is regulated. Obviously, Evergran has a lot of us

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<v Speaker 4>sort come but I think in a highly regulated environment,

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<v Speaker 4>we need to learn from the past. What are the

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<v Speaker 4>factors contributing to the fact that it allows Evergrand to

0:14:12.240 --> 0:14:17.000
<v Speaker 4>blow from a very small development to the country's largest.

0:14:17.520 --> 0:14:19.600
<v Speaker 4>I think that is the biggest question.

0:14:20.400 --> 0:14:24.320
<v Speaker 3>Yeah, I think it also reveals how the timing of

0:14:24.400 --> 0:14:30.000
<v Speaker 3>the regulation is critical because in twenty sixteen through twenty

0:14:30.080 --> 0:14:34.280
<v Speaker 3>twenty one, China has went through this period of exuberance

0:14:34.440 --> 0:14:38.320
<v Speaker 3>growth in its housing market. But if we look at

0:14:38.360 --> 0:14:40.960
<v Speaker 3>Everywhe's balance sheet, you know it's not that tequity. It

0:14:41.120 --> 0:14:44.000
<v Speaker 3>was over three hundred percent at one point, and I

0:14:44.040 --> 0:14:48.200
<v Speaker 3>think it could be argued that regulatory efforts could have

0:14:48.320 --> 0:14:53.160
<v Speaker 3>come in earlier to cool down the market and try

0:14:53.240 --> 0:14:56.960
<v Speaker 3>and help some of these developers the leverage earlier than

0:14:57.040 --> 0:14:59.640
<v Speaker 3>in twenty twenty one when the spirit lines came in

0:14:59.720 --> 0:15:04.800
<v Speaker 3>and the bubble spot. The downturn came very drastically, and

0:15:04.920 --> 0:15:07.400
<v Speaker 3>what happened with Every Grand spread to a lot of

0:15:07.440 --> 0:15:11.160
<v Speaker 3>other private developers and the damagers to confidence was done

0:15:11.160 --> 0:15:13.160
<v Speaker 3>to the market in a way that you know, we

0:15:13.200 --> 0:15:15.760
<v Speaker 3>are two and a half years into the crisis, and

0:15:16.360 --> 0:15:18.600
<v Speaker 3>right now it's like, no matter how much the government

0:15:18.640 --> 0:15:20.960
<v Speaker 3>is trying to push our more policy support. The market

0:15:21.000 --> 0:15:24.200
<v Speaker 3>is not reacting, home sales is not picking up, and

0:15:24.400 --> 0:15:27.680
<v Speaker 3>China is now in a very difficult situation with its

0:15:27.760 --> 0:15:31.120
<v Speaker 3>housing market when the damagers to confidence is very hard

0:15:31.160 --> 0:15:32.400
<v Speaker 3>to be undone.

0:15:33.040 --> 0:15:35.840
<v Speaker 2>And Christy talking about confidence, This court ruling could not

0:15:35.920 --> 0:15:39.280
<v Speaker 2>have come at a worse time. China's stock markets have

0:15:39.400 --> 0:15:42.840
<v Speaker 2>been reeling, the authorities have been trying to prop up

0:15:43.080 --> 0:15:46.080
<v Speaker 2>the equity markets. Do you think this is a big

0:15:46.120 --> 0:15:48.120
<v Speaker 2>blow to authorities efforts?

0:15:48.960 --> 0:15:51.440
<v Speaker 3>I think just in the recent weeks, we have seen

0:15:51.480 --> 0:15:55.200
<v Speaker 3>a wave of stimulus measures. You know, on Thursday we

0:15:55.320 --> 0:15:57.440
<v Speaker 3>have the government coming out saying we are going to

0:15:57.480 --> 0:16:02.280
<v Speaker 3>support commercial property loans from developers. On Friday is talking

0:16:02.320 --> 0:16:05.800
<v Speaker 3>about supporting the financing of property projects, and then on

0:16:05.840 --> 0:16:09.320
<v Speaker 3>Saturday we have Guangzho rolling back its home purchased cubs.

0:16:09.800 --> 0:16:13.040
<v Speaker 3>So all these steps taken to try and prop up

0:16:13.360 --> 0:16:15.920
<v Speaker 3>the housing market in China, and yet we have this

0:16:16.120 --> 0:16:20.120
<v Speaker 3>liquidation from Everygrand and it's like boom reminding people about

0:16:20.160 --> 0:16:25.080
<v Speaker 3>the health of the China real estate industry and reminding

0:16:25.080 --> 0:16:28.320
<v Speaker 3>people to be cautious about private developers. Given you know,

0:16:28.360 --> 0:16:30.720
<v Speaker 3>this is the fate of Everygrand, which is the first

0:16:30.800 --> 0:16:33.680
<v Speaker 3>one to default On is dead, but we still have

0:16:33.800 --> 0:16:37.080
<v Speaker 3>a lot of other developers that are suffering from non

0:16:37.160 --> 0:16:41.120
<v Speaker 3>payments and not anywhere near to reaching a restructuring deal.

0:16:41.200 --> 0:16:43.240
<v Speaker 3>And it means that you know, we're seeing this drawn

0:16:43.320 --> 0:16:46.400
<v Speaker 3>our process of recovery for the sector, and that's still

0:16:46.440 --> 0:16:49.000
<v Speaker 3>a question mark in a lot of whome buyas mind

0:16:49.120 --> 0:16:52.000
<v Speaker 3>thinking can I invest in a property right now in China?

0:16:53.200 --> 0:16:57.160
<v Speaker 2>Daniel? Last question to you, what is evergrand saga going

0:16:57.160 --> 0:16:59.800
<v Speaker 2>to mean for the high yield issuance market?

0:17:00.680 --> 0:17:05.040
<v Speaker 4>Oh, it's actually very damaging if you look at what

0:17:05.280 --> 0:17:08.520
<v Speaker 4>happened in terms of issuance or the issuance market. Is

0:17:08.560 --> 0:17:11.520
<v Speaker 4>that so meaning that they're not able to get any

0:17:11.760 --> 0:17:17.280
<v Speaker 4>financing also and Onsolt they get limited with financing. And

0:17:17.440 --> 0:17:21.080
<v Speaker 4>also if you look at the financials, I would say

0:17:21.080 --> 0:17:24.639
<v Speaker 4>it's worse than like two thousand and eight crisis definitely,

0:17:25.160 --> 0:17:28.879
<v Speaker 4>and probably worse than the Asia financial crisis when you

0:17:28.920 --> 0:17:32.199
<v Speaker 4>look at the numbers from a bottom up perspective. So

0:17:32.400 --> 0:17:36.520
<v Speaker 4>meaning that this setter is not going to recover any

0:17:36.600 --> 0:17:40.240
<v Speaker 4>time soon. Maybe it would become like a much smaller

0:17:40.280 --> 0:17:41.760
<v Speaker 4>sector in the years ahead.

0:17:42.080 --> 0:17:44.280
<v Speaker 2>Okay, Dan, you might have to expand your coverage there

0:17:44.320 --> 0:17:44.919
<v Speaker 2>going forward.

0:17:45.320 --> 0:17:45.679
<v Speaker 4>Thank you.

0:17:46.960 --> 0:17:51.240
<v Speaker 1>We've been discussing ever Ground and the latest chapter in

0:17:51.440 --> 0:17:57.240
<v Speaker 1>China's property crisis with Christie Hung, a senior equity analyst

0:17:57.359 --> 0:18:02.800
<v Speaker 1>covering China properties, and Annual Fans senior credit analysts covering

0:18:02.880 --> 0:18:06.840
<v Speaker 1>China real estate, Christy and Dan. The drama continues to

0:18:07.000 --> 0:18:10.920
<v Speaker 1>unfold and we look forward to tracking developments as they

0:18:11.000 --> 0:18:13.159
<v Speaker 1>happen and keeping in touch again.

0:18:13.720 --> 0:18:15.600
<v Speaker 3>Thank you, Tom, our pleasure to be here.

0:18:15.720 --> 0:18:16.720
<v Speaker 4>Thank you everyone.

0:18:17.119 --> 0:18:19.280
<v Speaker 1>I'm Tom Corbett in Hong Kong.

0:18:19.280 --> 0:18:22.439
<v Speaker 2>And I'm John Lee. This podcast was produced by Clara

0:18:22.520 --> 0:18:25.240
<v Speaker 2>Chan and you've been listening to the Asia Centric podcast