Can China's Evergrande Group survive amid mounting debts, depleting resources?

Published 18 July 2023, 16:45:38.754 GMT

(MINT) - Concerns have been raised by creditors and analysts regarding the viability of China Evergrande Group's (3333.HK) restructuring plan and operations. This comes as the company's long-overdue reports for the past two years reveal significant liabilities and a decrease in cash.

Adding to the unease, Evergrande's auditor commented that it could not provide an opinion on the reports due to material uncertainties surrounding the company's ability to sustain its operations as a going concern.

"The financial statements provide little evidence the group can normalize operations after a debt restructure," said Charles Macgregor, head of Asia of Lucror Analytics.

Evergrande, a major player in China's property sector, faced a liquidity crisis in mid-2021, causing significant concerns. Being burdened with one of the largest debt burdens in the country, the company's financial troubles have had far-reaching effects on the real estate industry, which is a crucial component of China's economy. As a result, numerous defaults and incomplete housing projects have emerged throughout the nation, further exacerbating the situation.

In an attempt to address its financial woes and restore operations, Evergrande announced a plan for offshore debt restructuring in March. The company anticipated that this restructuring would enable a gradual resumption of its activities and the generation of much-needed cash flow. Currently, Evergrande is actively seeking support from its creditors to successfully navigate through this process.

The financial report released by Evergrande on Monday painted a grim picture, revealing a combined loss of $81 billion for the years 2021 and 2022.

Moreover, the company's total liabilities reached a staggering 2.4 trillion yuan ($335 billion) in 2021, marking a 23% increase compared to the previous year.

Evergrande's existing borrowings, which were valued at 587.1 billion yuan at the end of 2022, increased its difficulties. Meanwhile, its cash reserves plummeted to 14.3 billion yuan, a significant decline from 2021's 28.8 billion yuan and 2020's 180.7 billion yuan. These figures highlight the pressing financial difficulties the company faces, further raising concerns about its ability to overcome its mounting debt and restore stability to its operations.

Offshore Debt

Creditors and analysts eagerly await convening hearings for Evergrande's offshore debt restructuring, hoping for clarity on the company's prospects.

The hearings, set for July 24 and 25 in Hong Kong and the Cayman Islands, will allow creditors to review and potentially approve the restructuring plan.

Concerns arise regarding the share suspension's negative impact, including delisting risks. Evergrande offers various options to creditors, such as debt-to-equity swaps.

A "disclaimer of opinion" from auditor Prism Hong Kong and Shanghai Limited adds complexity, as fulfilling requirements to resume trading becomes crucial.

Some creditors remain cautious, but others see publishing the reports as progress amidst low expectations. The situation is believed to be Evergrande's worst phase, with optimism for improvement.

By Kaustubh Bhosale