China Evergrande Selloff Deepens as Concern Mounts Over Its Financial Health – Update

(Dow Jones) -- China Evergrande Group's bonds and shares came under a second day of heavy selling pressure on Friday, as investor concerns grew about the large property developer's financial health despite its attempt to calm such worries.

The company's shares tumbled to a fresh four-month low and its dollar bonds sank to distressed levels, after a major credit-rating firm cut its outlook on Evergrande and unverified documents about the company were circulated online.

The deepening selloff, which spilled over into shares of some rival real-estate companies, showed how fragile investor confidence is in the group -- China's largest property developer by contracted sales last year and Asia's largest junk-bond borrower.

Evergrande late on Thursday said the documents, concerning a restructuring of its Hengda Real Estate unit, were fake.

Evergrande previously said it could be on the hook to repay strategic investors in Hengda up to 130 billion yuan, the equivalent of $19 billion, if it can't list the business in mainland China by January.

Hours after the market's close on Friday, Evergrande said the Hong Kong stock exchange had approved the spinoff of another subsidiary, its property-management arm, and it would apply to list that unit shortly.

Evergrande has already agreed to bring in outside investors to that business too, raising 23.5 billion Hong Kong dollars, the equivalent of $3 billion, by selling a stake of about 28%.

Late on Thursday, S&P Global Ratings cut its outlook on junk-rated Evergrande to negative from stable, saying the group's liquidity was weakening.

The ratings company said Evergrande's short-term debt had surged, partly due to it buying property projects, and it was likely to have to repay some of the sums owed to strategic investors in Hengda. S&P rates Evergrande B-plus, four notches below investment-grade.

On Friday, Evergrande's dollar debts tumbled further. Its bonds due January 2024 fell to about 76 cents on the dollar, pushing up yields to nearly 21%, according to Tradeweb.

Evergrande's stock initially surged, to recoup Thursday's losses, before selling off again. It closed 9.5% lower at 13.78 Hong Kong dollars apiece, according to FactSet, giving the company a market capitalization of HK$199 billion, the equivalent of $25.7 billion. Rival Agile Group Holdings Ltd. Lost 6.7% and Kaisa Group Holdings Ltd. fell 5.4%.

In China's onshore markets, some yuan-denominated Evergrande bonds fell more than 20% in price -- such a steep fall that they were briefly halted from trading under Chinese market rules.

Some analysts and investors said Evergrande had options to ensure it met its coming obligations. Analysts at Hong Kong-based brokerage CLSA sent a note titled "Fake News" to clients Friday morning. They reiterated their buy rating on the stock, saying Evergrande was able to deleverage and had strong relationships with its strategic investors.

Travis Lundy, an independent analyst who publishes on investment-research platform Smartkarma, said Evergrande could if needed sell some of the 1.252 trillion yuan, or $183 billion, in properties under development that it reported as of June.

But he said that wouldn't solve all of Evergrande's longer-term challenges, given it pays 12% or 13% interest to borrow in dollars. That meant it needs the value of the land held in its land bank to rise rapidly, he said.

Evergrande will struggle to sell new dollar bonds for now, but could issue new stock if needed, said Charles Macgregor, head of Asia for credit-research firm Lucror Analytics.

Mr. Macgregor said it would also have to strongly consider selling better projects to rival developers, and it should rethink plans to pour cash into its electric-car business, Evergrande New Energy Vehicle Group Ltd. "It's not a good time to be doing that right now," he said.

Tommy Tsang, a money manager with Alpha Sherpa Capital in Hong Kong, said he began shorting, or betting against, Evergrande shares on Friday morning, citing the group's high debts, declining profit margins and potential regulatory risks.

By Xie Yu and Mike Bird