(Bloomberg) — China Evergrande Group scrapped talks to offload a stake in its property-management arm and said real estate sales plunged about 97% during peak home-buying season, worsening its liquidity crisis on the eve of a dollar-bond deadline that could tip the company into default.
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In statements to the Hong Kong exchange late Wednesday, Evergrande added that it had made no further progress on asset sales and may not be able to meet its financial obligations. Its shares plunged as much as 14% on Thursday after resuming trading following a three-week halt.
The deal fell apart even after government officials in Evergrande’s home province of Guangdong helped broker the talks, a person with knowledge of the matter said. It comes days before the end of a grace period on a dollar-bond coupon that the company failed to pay in September. Evergrande’s 8.25% note due March 2022 was indicated at 23.8 cents on the dollar, Bloomberg-compiled data show.
The property giant’s cash crunch has become one of the biggest risks to the Chinese economy, eroding confidence in a real estate sector that by some estimates accounts for nearly a quarter of gross domestic product. Evergrande’s crisis is also fueling concerns about financial contagion, with at least two other developers defaulting on dollar bonds this month and yields on Chinese junk bonds hovering near the highest level in a decade.
Evergrande, controlled by billionaire Hui Ka Yan, said it ended talks last week to sell 50.1% of its stock in Evergrande Property Services Group Ltd. for about HK$20 billion ($2.6 billion).
The potential acquirer, Hopson Development Holdings Ltd., said in its own statement that it “regrets to announce that the vendor has failed to complete the sale” of the Evergrande Property Services stake, and asked for its shares to also resume trading.
Guangdong officials offered to arrange bank loans for Hopson to fund the stake purchase, a person with knowledge of the matter said, asking not to be identified discussing private information. The companies failed to reach an agreement partly due to opposition from some Evergrande Property Services independent directors and creditors, the person said.
The three companies and the Guangdong government didn’t immediately respond to requests for comment.
Trading in the firms had been suspended since the start of the month pending an announcement of a major transaction. Evergrande Property Services fell as much as 10% on Thursday. Hopson rose 6.6%.
Meanwhile, shares of Chinese developers rallied in Shanghai and Hong Kong after government officials including Vice Premier Liu He said that risks in the property market are controllable.
Evergrande said its contracted property sales for September through Oct. 20 totaled 3.65 billion yuan ($571 million), a tiny fraction of the 142 billion yuan it recorded from Sept. 1 to Oct. 8 last year.
Tumbling sales and the scrapped unit deal increase pressure on Hui to find alternative ways to raise cash. Bondholders, banks and other creditors have grown increasingly concerned about being repaid by the world’s most-indebted developer, which has more than $300 billion of liabilities. The 30-day grace period for an $83.5 million bond interest payment expires this weekend. Creditors could seek to demand the company immediately repay the debt, which may trigger cross-defaults on other Evergrande debt.
Separately, Evergrande secured agreement for an extension of more than three months on a $260 million bond issued by Jumbo Fortune Enterprises and guaranteed by the developer, according to a report by credit research provider REDD.
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Financial regulators have encouraged Evergrande to take all measures possible to avoid a near-term default on dollar bonds, while focusing on completing properties and repaying individual investors. The company has also fallen behind on payments to banks, suppliers and holders of onshore investment products. Selling prized assets, even at a discount, was seen as central to the strategy of finding cash.
The sale of the management unit could have brought “short-term relief” to Evergrande’s liquidity crunch, Bloomberg Intelligence analyst Lisa Zhou wrote in a note before the talks ended. It could also have bought time for the developer to fix its offshore funding issues, BI credit analyst Daniel Fan said.
The property-services business, which went public in Hong Kong last year, has been a useful source of income for the cash-strapped parent. It reported full-year net income of 2.65 billion yuan, compared with 10.5 billion yuan for Evergrande. The unit has fallen less than its parent in Hong Kong trading this year, with a drop of 43% before the halt, compared with Evergrande’s 80% decline.
Hopson is a Guangdong-based real estate firm controlled by the family of billionaire Chu Mang Yee. Listed on the Hong Kong Stock Exchange since 1998, the shares gained 38% this year before the trading halt.
The end of talks come as smaller Chinese real estate firm Sinic Holdings Group Co. failed to repay interest and principal of its $250 million note due Monday, and follows a surprise default earlier this month by Fantasia Holdings Group Co. Modern Land (China) Co. suspended trading in Hong Kong Thursday after canceling its request to extend the maturity of a dollar bond by three months.
A government clampdown on real estate companies threatens to create more defaults, adding to broader risks facing China’s economy. Home prices sank in September for the first time in six years. Economic growth slowed last quarter as the property and construction industries contracted for the first time since the start of the pandemic.
So far, authorities are largely resisting the urge to ease up on the industry. While there are “individual problems” in the real estate market, the risks are controllable overall, Vice Premier Liu said on Wednesday. Market moves are a “stress reaction” to some defaults, and property sector financing is becoming normal, People’s Bank of China Deputy Governor Pan Gongsheng said.
(Updates with reference to Guangdong’s role in the deal in third and seventh paragraphs)
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