Daily Management Review

After Police Surveillance For China Evergrande's Chairman Hui Ka Yan, What Comes Next?


According to a report by Bloomberg News on Wednesday, the chairman of China Evergrande Group has been placed under police observation, casting further doubt on the future of the troubled developer as it also deals with the growing likelihood of going out of business.
The most indebted real estate developer in the world, Evergrande, is at the epicentre of a historic liquidity crisis in China's real estate market, which makes up almost a quarter of the second-largest economy in the world.
Evergrande, once China's top-selling developer, has been in financial trouble since 2021, and a number of its competitors have also defaulted on their debt obligations abroad as a result of sluggish home sales and a lack of new funding opportunities.
In light of declining cash flows, Evergrande has been working to restructure $31.7 billion in offshore debt, which consists of bonds, collateral, and buyback obligations.
Evergrande presented different options to offshore creditors in March of this year as part of the strategy, including the conversion of a portion of their debt holdings into brand-new bonds with 10- to 12-year maturities.
But those preparations have been derailed by a weekend statement that it will be unable to issue new debt due to a regulatory probe being conducted into one of its biggest Chinese companies.
Unless Evergrande can propose a fresh restructuring plan before then, a sizable number of Evergrande offshore bondholders intends to join a liquidation petition scheduled to be considered in Hong Kong on October 30.
It is unlikely that the government will step in anytime soon to help Evergrande and provide outside cash support.
The worst-case scenario for Evergrande might involve liquidation, which would result in the company's demise and a reduction of its debt to zero, with implications for its lenders.
In such a scenario, the company's executives, officials, and overseas assets will be subject to the claims made by the offshore bondholders, giving them a chance to partially recover their lost investment.
Evergrande was established by Hui in Guangzhou in 1996, and in 2009 the business was listed in Hong Kong. Through a land-buying binge financed by loans and quick flat sales at low margins, the company expanded quickly.
A government crackdown on the debt-fueled building boom caused Evergrande's liabilities to soar to more than $300 billion, and the company soon came under pressure as China's real estate market collapsed.
As the real estate empire started to fall apart under increasing pressure to fulfil debt obligations and complete apartment building, Evergrande's organisational structure and the manner in which the company was run by Hui have come under investigation.
Hui was taken away by police earlier this month and is being watched at a certain location, according to Bloomberg News, which cited sources.
The news follows earlier this month's announcement by authorities in southern China that they had detained a number of employees at Evergrande's wealth management division, which solicited money from retail customers by offering financial products.
The police operations against Evergrande suggest that Hui may not hold onto his position as CEO for very long, although it is unknown who would succeed him or whether the government would have any influence over the company's management.
With sales of $110 billion in 2020, Evergrande will rank among the largest and most successful real estate developers in China thanks to its explosive growth. Its downfall has been as stunning.
The developer was also the largest dollar bond issuer in the industry due to its quick borrowing spree during its heyday.
After the company missed multiple bond payments in late 2021, the all of its offshore debt was declared in default, and creditors have been trying to find a solution ever since.
As financial circumstances worsened and competing developers began to struggle, some of them were driven into default, Evergrande's downturn started to spread to the rest of the Chinese real estate market.
After remaining silent about the Evergrande crisis in 2021, a central bank official accused the corporation of poor internal operations and management in October of that same year. The representative claimed that Evergrande "blindly diversified and expanded its business".
A risk-management committee, which included representatives from state enterprises, was set up at the developer in December 2021 as the crisis worsened to help with its debt and asset restructuring.
Soon after, the government raced to reassure the markets that dangers to the real estate industry and economy could be managed.
Beijing has implemented a number of policies over the past year to promote the real estate industry while encouraging developers to focus on finishing unfinished homes, even though it is unknown whether the government has provided direct assistance to Evergrande.