Evergrande Probe Finds Management Missteps and Convoluted Financing Arrangements

Following the conclusion of an almost yearlong investigation into the “particular financing mission” this week, Evergrande mentioned it was in discussions with its property-services arm to replenish the deposits that had been seized. It largely plans to repay the cash by transferring property from the group stage to Evergrande Property Providers, the 2 corporations mentioned on Wednesday.

Evergrande was as soon as the biggest real-estate developer in China by contracted gross sales, and is the world’s most indebted developer with round $20 billion in junk-rated greenback bonds. It slid into monetary misery in 2021 after a debt-fueled growth and defaulted on its bonds, leaving worldwide buyers with heavy losses. The property group final reported whole liabilities equal to about $300 billion as of June 2021, and has but to file its annual report for that yr. Its shares have been suspended from buying and selling since early 2022.

The lacking $2 billion at Evergrande’s property-services unit has prompted offshore bondholders to see crimson, as a result of the unit was among the many group’s most dear offshore property. Evergrande has spent a lot of the previous yr attempting to work out a debt-restructuring plan with its worldwide collectors, however has but to map out its particulars.

The deposits the banks seized represented greater than 90% of Evergrande Property Providers’ money holdings on June 30, 2021, in accordance with a separate assertion from the subsidiary. 

Beneath the particular financing association, eight Chinese language industrial banks lent cash to 36 third-party corporations, and the deposits of six subsidiaries of Evergrande Property Providers had been pledged as safety for the borrowings. The third events then lent the cash to Evergrande itself. When Evergrande missed funds on a few of these loans, the banks claimed the deposits. 

The investigation—performed by a committee of unbiased Evergrande administrators who had been suggested by an outdoor regulation agency—discovered issues with the group’s inner controls. The committee mentioned there was “a excessive diploma of deference” to senior administration and Evergrande executives, and a few workers concerned within the transactions felt it wasn’t their place to query what they had been informed to do.

As well as, firm chops—or official rubber stamps—of Evergrande subsidiaries might have been used with out their administration’s approval. Such company chops are utilized in China for certifying authorized paperwork and signing contracts. Agreements that solely carry signatures however not the company imprint aren’t legally binding. 

In July final yr, Evergrande ousted three of its prime executives, together with longtime Chief Govt Officer

Xia Haijun

and Chief Monetary Officer

Pan Darong,

for his or her involvement within the financing association that led to the $2 billion being seized.

Evergrande mentioned on Wednesday that it’s going to enhance inner controls, re-examine the usage of firm chops and supply coaching to managers, giving them a agency understanding of their tasks.

After a government-led deleveraging marketing campaign started two years in the past to curb the borrowings in China’s property sector, Evergrande grew to become one of many first builders to come across a liquidity disaster. It stopped making funds to its contractors, which in flip suspended the development of its constructing initiatives. The developer mentioned most building work has since resumed, and that it’s working to ship the properties it has promised patrons. 

In January, PricewaterhouseCoopers resigned as Evergrande’s auditor. The developer mentioned the 2 had didn’t agree on a timetable to finish the audit work of its 2021 annual report, which is essential to finish its restructuring. It then employed a Hong Kong accounting agency as its new auditor.

Evergrande has bought some high-profile property to repay its debt, together with a plot the place it had deliberate to construct its headquarters and land that it wished to grow to be the world’s largest soccer stadium. 

Write to Cao Li at li.cao@wsj.com and Rebecca Feng at rebecca.feng@wsj.com