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The backstory: If you haven't heard of it yet, the China Evergrande Group, aka Evergrande, is the second largest property developer in China. Or, at least, it was. In 2018, it was considered by some to be the most valuable real estate company in the world. But now, based on current estimates, the company is the most indebted property developer in the history of China, with more than US$270 billion in liabilities. This is all because the company used borrowed money to support its projects.
A while back, Evergrande started getting more involved in ventures outside of real estate. It dumped billions of borrowed dollars into electric vehicles, theme parks, energy and other sectors. But, just like anybody else, when you borrow money, you have to pay back what you borrowed over time, and Evergrande was running into a problem with the paying back part.
More recently: About 18 months ago, Evergrande announced that it couldn't pay back its investors. Everyone involved knew how bad this was. It's one thing when someone borrows a few dollars and never pays it back, but it's a disaster when US$270 billion disappears from an entire country. It was all hands on deck as the Chinese government, Evergrande and other companies looked at solutions to the problem.
Last month, the plan was for Evergrande to restructure its debt, which basically means it agreed to pay back the debts with new interest rates and payment plans. This is typically a win/win because the company doesn't close its doors, and the lender gets more money than in a bankruptcy. To get this restructuring to go ahead, Evergrande needs to get 75% approval from its creditors.
The development: A few days ago, the company announced it needed to extend the deadline for creditors to back the restructuring by three weeks because it hadn't received enough support. The plan initially in place had creditors broken up into different groups called Class A, Class B and Class C.
Each class is determined by how much of a certain type of debt the creditor is holding, and Evergrande needs 75% support in each category to go ahead with the plan. Class C is currently under that 75% threshold as they meet with their lawyers and make demands before agreeing to anything. With the new deadline set for May 18, it'll be some time before we know whether or not Evergrande's restructuring plan will go through.
“Creditors will need to take a leap of faith in the equity upside for these entities,” said analysts from CreditSights in April.
“Evergrande continues to represent a very significant credit risk,” said Brock Silvers, chief investment officer at Kaiyuan Capital. “[It] speaks to a business model that appears incapable of supporting even the company’s restructured indebtedness.”
“For creditors, this just means that they now have a not-so-good chance of getting some money back, instead of getting almost nothing back, ” said Chanson & Co’s managing director Shen Meng