Thursday’s announcement by Evergrande was as ominous as it was curt. Hui Ka Yan, the billionaire chair behind the indebted Chinese property group, was under unspecified “mandatory measures” for suspicion of “illegal crimes”.
The one-page release was typically short on details from a company that has been locked in an opaque restructuring process since it defaulted on its international debts two years ago. But between the lines, it captured a wider shift in mood.
This was intended to be the moment when after two years of fractious negotiations, investors were getting closer to a deal. Instead, the uncertainty over Hui is just one of a series of indicators that seem to make the fate of Evergrande more difficult to determine.
Employees of its wealth management subsidiary were also detained this month, police in Shenzhen said. Its restructuring plan was this week derailed by an official investigation and it also missed payments on onshore bonds.
More than ever, the future of the developer, which with more than $300bn in liabilities has come to embody both the excesses of a Chinese multi-decade property boom and its recent unravelling, appears tied to Beijing.
Policymakers are under pressure to tackle a property slowdown that shows few signs of ending. Since Evergrande’s default, the sector, which typically accounts for more than a quarter of economic activity, has weighed on growth alongside the impact of a three-year zero-Covid policy.
The investigation into Hui was part of the “standard playbook”, said one person involved in property projects in the Chinese mainland. “The thing has collapsed and people are held to account,” he said.
In this context, the debt restructuring of the world’s most indebted property developer has attracted even more scrutiny.
“It’s very clear to us what will happen if there isn’t a restructuring,” said one person familiar with the restructuring discussions. “This will be a gigantic liquidation that will have far-reaching consequences for everyone involved in the history of this company: directors, advisers, auditors.”
Investors in Evergrande’s billions of dollars of offshore debt were this week supposed to vote on a plan that would have led to their receiving new notes linked to the equity of the group’s Hong Kong-listed subsidiaries. Evergrande shares, suspended since March 2022, resumed trading in late August in anticipation of the plan’s approval.
$300bnEvergrande’s total estimated liabilties
But the scheme was derailed at the last minute. In a filing to the Hong Kong stock exchange, the company cited an official “investigation” as a reason for the delay. It did not say who was conducting the investigation. In August, it said there was a China Securities Regulatory Commission investigation into information disclosure.
People familiar with the matter said they had been told the CSRC had rejected an application to issue the new equity-linked instruments. It is unclear why this application was rejected.
Evergrande has hired US firm Houlihan Lokey and law firm Sidley Austin to represent it in its talks over the offshore restructuring.
Investors, which had about $20bn in international debt at the time of its default and are represented by law firm Kirkland & Ellis and investment bank Moelis, threatened legal action in 2022 and complained over a lack of engagement. The tone improved when the now-derailed plan emerged in March.
One person involved said there had this week been a lot of “strategising” to try to “reconstruct” the plan in a way that avoided any conflict with the CSRC.
Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital in Hong Kong, said the restructuring had suffered a “setback” but suggested that “all parties were anxious to avoid a wind-up”.
Investors in dollar bonds are “not in a strong position” but “could still dramatically worsen the company’s situation” because of their legal claims, he said, while regulators “need Evergrande to survive to bolster the economy and placate domestic investors and suppliers”.
A wipeout of dollar bonds “would also ruin the outlook for offshore debt issuance at a time when China is desperately seeking foreign investment”.
Evergrande, which in July disclosed losses of $81bn over 2021 and 2022, this week missed Rmb4bn ($548mn) in payments on a mainland bond, according to a Shenzhen filing. Silvers noted authorities are “very sensitive to such domestic market turbulence”.
Early in the pandemic, Beijing introduced limits on leverage at developers, as well as other policies designed to stop the housing market overheating. But, as sales at major developers have slumped, it is now showing signs of easing its approach. City authorities have in recent weeks removed some purchase constraints on first-time buyers.
Fitch, the rating agency, on Thursday said that stress in China’s property sector would “continue to pose cross-sector credit risks in the near term”, and that “the government’s modest policy easing to date is unlikely to drive a sharp turnaround in homebuyers’ sentiment”.
While the government’s position on Evergrande and its restructuring is unclear, the new announcement related to Hui hints at consequences for the individuals involved.
Hui, who was born in 1958 and launched Evergrande in the 1990s, was once known for his political connections but was excluded from the Chinese People’s Political Consultative Conference, an advisory body to the government, in 2022.
Uncertainties over his whereabouts only adds to the doubts over the restructuring. “No one wants to be publicly responsible for this name in any shape or form,” the person familiar with the restructuring said.
“You don’t really know who’s controlling the company,” the person added, pointing to the presence of a company board, an executive management team and risk committee involved in the restructuring. “Trying to understand who is the relevant decision maker is very difficult.”
Additional reporting by Gloria Li in Hong Kong and Cheng Leng in London