Chinese Property Giant Evergrande Drops Unit Listing

(Dow Jones) -- China Evergrande Group, the heavily indebted property developer, has scrapped plans to list a key unit after striking deals with co-investors that should avert a near-term cash crunch.

However, after abandoning the plan to take its Hengda Real Estate subsidiary public, Evergrande still needs to find ways to cut its borrowings so that it isn't in breach of official red lines on property-industry debt, analysts said.

Evergrande was China's largest property developer by contracted sales last year and is Asia's largest junk-bond borrower. The heavily indebted company is known for unconventional financial tactics and for venturing into other business lines like electric vehicles.

Evergrande first proposed listing Hengda on the mainland in 2016. It raised 130 billion yuan, equivalent to $19.7 billion, by selling a little more than a third of Hengda to strategic investors and was on the hook to repay those investors if the unit wasn't public by January 2021.

It has waited years for approval of the backdoor listing, via a merger with the publicly traded Shenzhen Special Economic Zone Real Estate and Properties (Group) Co., as China has made it harder for property developers to raise funds.

Evergrande's shares and bonds sold off steeply in September after documents circulating online appeared to show it requesting urgent approval for the deal. Evergrande said those documents were fake.

Late Sunday, Evergrande said it dropped the backdoor listing plan. Investors holding 122 billion yuan of Hengda stock--or nearly 94% of the total outside shareholdings--had either already agreed to hold on to their stakes and not demand a buyback, or would enter "supplemental agreements" to this effect soon, the company said. It said it would buy back 3 billion yuan worth of shares and is still negotiating over 5 billion yuan more.

Leif Chang, an analyst at Nomura, said the termination of the listing plan was no surprise after a four year wait and progress with strategic investors was better than expected.

"The latest progress reassured the market that Evergrande might be off the hook for now," Mr. Chang said.

Evergrande shares rose 2.3% in Hong Kong on Monday to HK$16.86 and its dollar bonds edged up in price. The stock has swung sharply in recent months and is down nearly 22% this year.

Luther Chai, an analyst and credit strategist at CreditSights in Singapore, said he remained wary about what specific terms Evergrande had agreed upon with investors to persuade them to stay on board. No terms were disclosed in the filing.

Still, he said the worst case for now was a payout of 8 billion yuan, which would be small compared with its cash on hand.

"So it looks [like] a fairly good resolution to what happened in the past two months," he said.

Mr. Chai's team estimates Evergrande may need to refinance some 263 billion yuan worth of short-term debt by the end of the year, mainly from maturing bonds and trust loans. That means Evergrande needs funding of about 58 billion yuan in excess of its cash, which totaled 205 billion yuan at the end of June.

Likewise, Chuanyi Zhou, a credit analyst at research firm Lucror Analytics, said there was little clarity on how long outside investors would retain their stakes, or the financial terms Evergrande had agreed upon in order to strike the deal. An Evergrande spokesperson didn't comment beyond the company's release.

Ms. Zhou said Evergrande had other ways to cut its debt. These included listing its property management arm in Hong Kong, selling stakes in its electric-vehicle business to strategic investors or via a Shanghai second listing and boosting home sales through additional price cuts, she said.

By Xie Yu