Evergrande’s debt revamp roadblock hits China property investors’ sentiment

China Evergrande Group, the world’s most indebted property developer, faced a sell-off in its shares on Monday after encountering trouble in finalizing a debt restructuring plan. The news has reignited concerns about the crisis-hit property sector, which had seen a brief respite. Evergrande has been working to gain approval from creditors for a debt restructuring plan since defaulting earlier this year. However, the company announced on Sunday that it was unable to issue new debt due to an ongoing investigation into its main subsidiary, Hengda Real Estate Group. The unexpected setback has resulted in a plunge in Evergrande shares and a decline in the Hong Kong Hang Seng mainland property sector index.

Under the debt restructuring plan unveiled in March, Evergrande proposed options for offshore creditors to convert their current debt holdings into new notes with maturities of 10 to 12 years. However, with the investigation into Hengda, the company’s debt restructuring plan has hit a roadblock. Other options, such as converting the debt into shares of other listed units, are also deemed unworkable at this point.

Evergrande’s offshore debt restructuring involves a total of $31.7 billion, potentially making it one of the largest undertakings of its kind in the world. This setback for Evergrande comes after a brief respite for the Chinese property sector, which accounts for a significant portion of the economy. The sector had seen some support from Beijing’s measures and two other major property developers successfully forging debt deals with their creditors. However, the resurfacing concerns about the financial health of developers, particularly smaller ones with high levels of debt and few ongoing projects, are dampening sentiment in the property sector.

The difficulties faced by Evergrande are not unique, as a string of leading Chinese developers have already defaulted on their offshore debt obligations due to the liquidity crisis the industry has faced since 2021. Many of these developers are attempting to secure approval from offshore creditors for debt restructuring plans to avoid collapsing or being forced into liquidation. However, few of these plans have been successful. Another developer, China Oceanwide Holdings Ltd, which has also failed to meet debt obligations, announced on Monday that a Bermuda court has ordered the winding up of the company.

The latest setback for Evergrande’s debt restructuring plan comes just one week after police detained some staff members at its wealth management unit, leading to a drop in its share price. Evergrande had previously announced a delay in making a decision on offshore debt restructuring until next month to allow more time for debt holders to consider its proposal. The company requires approval from over 75% of debt holders for each class in order to proceed with the plan.

The challenges faced by Evergrande add to the ongoing struggles of leading developers like Country Garden, who are desperately trying to avoid default. Despite Beijing’s efforts to support the sector and stimulate property demand, the sentiment among home buyers remains depressed. To date, as of the end of August, there is still a significant amount of unsold homes in the market.

The latest developments in China’s property sector highlight the ongoing challenges facing developers and the wider economy. Investors and analysts will closely monitor how these troubles continue to unfold and assess the potential implications for the sector and the Chinese economy as a whole.