ChinaDaily Briefs

China: Evergrande Real Estate Group, iShares Barclays USD Asia High Yield Bond Index ETF and more

In today’s briefing:

  • Evergrande’s Very Special… Special Dividend?
  • Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

Evergrande’s Very Special… Special Dividend?

By Travis Lundy

Evergrande Real Estate Group (3333 HK) shares rallied enormously sharply in 2017, moving from the mid single digits to HK$30+ by Q3 that year. That year the float in Evergrande was also sharply reduced by the purchases of shares by Chinese Estates Holdings (127 HK) and its owners. 

When the shares fell back after getting squeezed, Evergrande conducted a buyback which got them within a hair’s breadth of the residual minimum free float requirement mandated by the Hong Kong Stock Exchange. The shares stayed higher. 

Eventually, Evergrande saw more of the employee share options with low exercise prices exercised which increased the share count and float so when shares fell in 2020, the company could buy back shares, and it did so after shares fell to new 3yr lows in the covid-crash. It bought shares back from May to June, again reducing float to within a hair’s breadth of the free float limit, and in the period, shares rose ~50%. 

Then at the start of H2, with a press release about unaudited June sales results and how strong sales had been in H1, the shares popped 40% (from HK$20 to HK$28/share) in three days, then fell back over 6 weeks, going back below HK$20 when the company disclosed it was pre-selling stakes in its property management unit before the IPO, and three days later Evergrande actually issued a profit warning, just before releasing H1 results. 

Also in August, but undisclosed at the time, was the fact that several major real estate developers, including Evergrande, had been called on the carpet to discuss their participation in the so-called Three Red Lines pilot program (the three red lines are a liability-to-asset ratio excluding advanced receipts of 70%, net debt-to-equity ratio of 100%, and cash to short-term debt ratio at 1x). Companies which crossed one of three red lines could not increase interest-bearing borrowing by more than 10% in a year. Cross two of them and they were capped at 5% growth. Cross all three of them and the developer could not increase debt at all. This is tough when funding at HSD to 10+% interest rates are used to carry non-interest-earning land bank. But Evergrande “met” all three so needed to reduce debt and raise cash, discussed in Evergrande May Be Facing a Funding Squeeze

There was a story about a “letter”, later denied by the company, in September, discussing the importance of the local government helping Evergrande deal with its short-term funding issues, which included the issue of the buyback guarantee offered by Evergrande to minority shareholders of Evergrande’s major onshore operating unit Hengda. Evergrande denied the existence of the letter, but despite the fact some Hengda shareholders reportedly wanted out as listing was unlikely, somehow, with the local government’s help, Evergrande announced a new agreement meaning repayment in January 2021 wasn’t necessary. The shares popped and two weeks later Evergrande raised some capital (discussed in Evergrande Equity Placement – Musical Shares.

I had my ideas about WHY those shares were placed, and it was not to raise equity to pay down debt. The capital raised was less than expected despite the large discount and the shares quickly fell below placement price.  So just 3 weeks after raising equity, it started buying back shares, reasonably quickly raising the price above where it had sold shares. This was discussed in Evergrande Equity De-Placement: Musical Shares. Then a couple weeks later, we saw Evergrande Terminate Hengda’s Backdoor Listing so the story left was one of an optically “cheap” but heavily indebted developer, lowering selling prices to liquidate inventory, lower debt and raise cash levels, etc. There were sales of shares of recently listed subsidiaries. There were announcements of how much debt had been lowered.

But shares fell. 

There were stories in Chinese media and in social media about issues with the company’s trade acceptance bills. An article on Bloomberg.com a week ago reported that while Evergrande chairman Hui Ka Yan was in Beijing for the 100th anniversary celebrations 1 July, he met with the Financial Stability and Development Committee, which urged him to solve his company’s debt problems pronto. The article is worth reading. It suggested more worry at the top than thought, and even says FSDC officials had suggested bringing in strategic investors. Hui said he was speaking with local investors. 

Bonds have traded lower and lower and the 2024-2025 maturity bonds appear to be trading in the 60s, with shorter-dated bonds trading at 30+% yield to maturity.

Wednesday, the shares closed at HK$8.91 – lowest in four years. 

Yesterday, there was new news. 

The company announced a board meeting for 27 July where the Board would consider a special dividend. 

My first reaction was, I admit, one of surprise, but on second thought it should not be THAT surprising.

The immediate public comments I have seen suggested an attempt to squeeze shorts. Yes, according to data from the SFC, shorts have risen from levels near-matching covid-crash lows, and now stand at roughly 2.1% of shares out (a bit under 10% of float), but that would not do it.

The single most indebted real estate company in the world, with short-term bonds yielding risk-free-rate plus…. [checks notes] 30+%, where the chairman gets called onto the carpet of the highest financial regulator in China – not the PBOC, CSRC, or CBIRC – above them – urging him to Do Something – sell assets, lower debt, raise equity – deciding to pay a special dividend to its equity holders? 

I expect Hui Ka Yan has his reasons, and I expect those reasons do not include rewarding long-suffering minority shareholders. Or squeezing shorts. 


Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

By BondEvalue

US markets dropped even as labor markets and earnings signaled a recovery. Initial jobless claims for the week ending July 10 stood at 360k, the lowest since the onset of the pandemic. These were under the 400k mark for the third week in a row but slightly higher than the expectation of 350k. S&P posted a loss of 0.3% while Nasdaq slid 0.7%. Morgan Stanley joined peers beating earnings expectations (details below). Energy, IT and Consumer Discretionary were down 1.4%, 0.8% and 0.6% respectively. Financials and Consumer Staples were up 0.4% each. US 10Y Treasury yields dipped 2bp to 1.32%. European indices also closed in deep red – FTSE, DAX and CAC were down ~ 1% each. US IG and HY CDS spreads widened 0.8bp and 4.4bp respectively. EU main and crossover CDS spreads widened 0.6bp and 3.8bp respectively. Brazil’s Bovespa was up 0.7%. Saudi TASI was up 0.2% while  Abu Dhabi’s ADX was down 0.2%. Asian markets mixed. Chinese growth was slightly lower than expected due to higher raw material costs and Covid-19 outbreaks. GDP expanded 7.9% YoY for the Apr-Jun quarter vs expectations 8.1% and vs 8.3% in the previous quarter. Nikkei is down 1.1%, Shanghai and HSI are down 0.2%  while Singapore’s STI is up 0.1%. Asia ex-Japan CDS spreads were 1.7bp wider.

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