Credit: Visual China

BEIJING, September 27 (TMTPost) – Giant property developer China Evergrande Group is under investigation, with its debt restructuring stranded, and its executives being probed one after another.

The regulatory authorities are stepping up their handling of Evergrande's problems, and the company is getting closer and closer to the final outcome.

Unable to issue new bonds

On the evening of last Sunday, Evergrande Group announced that as Evergrande Real Estate Group is under investigation, it currently lacks the qualifications to issue new bonds.

According to relevant regulations for real estate companies to issue bonds, i.e. Article 8 of the Trial Measures for the Administration of Overseas Issuance and Listing of Securities by Domestic Enterprises, there are five situations where overseas issuance and listing are not allowed. One of them is that domestic enterprises are under investigation for suspected crimes or major illegal and irregular activities, and there is no clear conclusion yet for the probe.

The announcement mentioned that "Evergrande Real Estate Group is under investigation,” and the date for the start of the probe was August 16, 2023. Evergrande Real Estate Group announced that it has received a Notice of Filing a case issued by the China Securities Regulatory Commission (CSRC), and the CSRC has decided to file a case against the group for suspected violations of information disclosure laws and regulations.

After the investigation was initiated, it was immediately known that new bonds could not be issued, and the announcement was issued only now perhaps because of the consideration for Evergrande's Hong Kong stock resumption on August 28.

In addition, being unable to issue new bonds means that Evergrande cannot borrow money through bond issuance, which means that the financing channel for Evergrande has been blocked, and that the overseas debt restructuring may end in failure.

Previously, the vote on Evergrande's debt restructuring was postponed until last Friday, when an announcement was directly made that the debt restructuring meeting would not be held due to lower-than-expected sales.

In March 2023, Evergrande announced a debt restructuring plan for its $19.15 billion (approximately 140 billion yuan) foreign debt, providing three options to creditors.

The first option is to replace the old debt with new bonds on a 1:1 basis, with a maturity of 10-12 years.

The second option is to convert to a combination of new notes with a maturity of 5-9 years, linked to the equity of Evergrande Property Services, Evergrande New Energy Vehicles, or Evergrande's listed stocks.

The third option is a combination of the above two.

In other words, all three options require the issuance of new bonds.

Now that Evergrande is unable to issue new bonds and its financing channels have been blocked, the debt restructuring has been put on hold, clearly indicating that the net is closing in on the company.

Senior executives being Investigated

The first executive to be taken away was Ke Peng, the former executive president of Evergrande Group, who was nabbed by the police for investigation last January in connection with his involvement in Evergrande's Shenzhen’s shanty town revamping.

The urban regentrification project in Shenzhen was once regarded as Evergrande's vital "ballast stone".

Back in 2016, Evergrande's financial report showed that it had 38 urban renewal projects in Shenzhen, with a total value of over 600 billion yuan upon the completion of the project. In 2019, Xia Haijun, the then president of Evergrande, stated that Evergrande had 48 projects in Shenzhen, making it the developer with the largest land reserve in the city, with enormous future returns. In 2020, Evergrande's financial report showed that out of the 104 projects operated by the company, 55 were in Shenzhen.

However, being investigated now indicates that illegal activities may be involved in the operation of these projects.

On September 16, Du Liang, the general manager of Evergrande Wealth Management, Evergrande's financial subsidiary, and other individuals suspected of crimes were taken into custody by the Shenzhen police. Rumors flew that those arrested are management members of Evergrande Wealth Management.

Evergrande Wealth Management is the "wallet" of Hui Ka Yan, which provided financing for Evergrande itself or its affiliated projects.

In August 2021, due to difficulties in redemption, Evergrande announced the suspension of external sales of its fixed-income products. According to data from the group, the total amount raised by the fixed-income products from initiation to suspension is approximately 92.1 billion yuan.

In September 2021, Evergrande Wealth Management collapsed, triggering investors across the country to seek legal remedies. On September 10, 2021, Hui publicly stated, "I can have nothing, but the investors of Evergrande Wealth Management cannot have nothing. We must ensure the full redemption of all matured wealth products as soon as possible, not a penny less."

However, according to the Main Results of the Internal Control Evaluation and Review of Certain Issues Raised by Former Auditors released by Evergrande on August 24, 2023, as of December 31, 2022, Evergrande Wealth Management still has 34 billion yuan in unpaid principal and interest.

On August 31, Evergrande Wealth Management once again announced that due to the slower progress of asset disposal and the failure to obtain funds from asset disposal, it was unable to carry out redemption for the month. From 8,000 yuan per month to 2,000 yuan per month, and then to a complete inability to redeem, in less than two years, the cash flow of Evergrande Wealth Management has been completely exhausted.

Now it seems that Hui's bold words at the time were just delaying tactics. Now that they cannot redeem, Evergrande Wealth Management may be involved in criminal activities.

Last Thursday, Zhu Jialin, the former Chairman of Evergrande Life Assurance, was reported to be under investigation.

Another “war chest" of Evergrande is "Evergrande Life Assurance," which has been fully taken over by the newly established state-owned insurance company, Haigang Life Insurance, due to its severe insolvency.

During Evergrande's heyday, Evergrande Life Assurance undertook the important task of providing "blood" for various businesses. Similar to Evergrande Wealth Management, it attracted the purchase of insurance products by selling high-yield universal life insurance policies, and then funneled the raised funds to Evergrande's real estate, automobile, and other businesses through trusts and other means.

Evergrande Life Assurance was renamed after it acquired a stake in Great Eastern Life Assurance (China) in 2015. Its total assets skyrocketed from 73.1 billion yuan in 2016 to 241.5 billion yuan in 2020, while its net profit plummeted from 1.24 billion yuan in 2017 to 333 million yuan in 2020. With severe insolvency, industry insiders suggest that its previously released financial reports may have issues. Zhu, who has served as the chairperson of Evergrande Life Assurance, may be implicated in this matter.

According to the reports from Caixin Global on Tuesday, former CEO of China Evergrande, Xia Haijun, and CFO Pan Darong have been detained or taken away.

Xia, the former president of Evergrande, is the most well-known and powerful figure in the group after Hui, known as the "emperor of the real estate industry".

Before Evergrande's collapse, Xia immediately sold his holdings of Evergrande U.S. dollar bonds, cashing out $56.69 million (approximately 360 million yuan). In the year of the collapse in 2021, Xia also successively reduced his holdings in Evergrande Property Services, Evergrande New Energy Vehicle, and Evergrande RV Bao, cashing out a total of approximately HKD 1.016 billion (approximately 827.2 million yuan).

In March 2022, it was exposed that Evergrande Property Services’ 13.4 billion yuan of funds had been seized by the authorities. As the investigation progressed, the three executives involved, Xia, Pan, and Ke, were asked to resign by the board of directors.

During his more than ten years at Evergrande, Xia held the second most important position in the group. Major events in Evergrande's development process cannot be separated from his involvement and decision-making, including issues related to the group’s wealth management.

The fact that Xia and others have been detained by relevant departments is a very clear signal that the tackling of Evergrande by the relevant authorities may have reached the final stage. Even former executives cannot escape their responsibility.

Difficult to make a comeback

With key personnel being arrested one after another, Evergrande is not far from its final outcome.

Since Evergrande's collapse, Hui has sold off Evergrande New Energy Vehicle shares, made a "technical" divorce, and filed for bankruptcy protection in the U.S. He may have to pay for this series of operations.

In the past six months, China Evergrande has disclosed multiple major litigation and unpaid debt issues related to Evergrande Real Estate. As of the end of July, Evergrande Real Estate was involved in pending lawsuits totaling more than 300 million yuan, with unpaid debts totaling 437.74 billion yuan, accumulated overdue commercial bills totaling 207.5 billion yuan. Currently, Evergrande Real Estate has more than 600 records of executed individuals, with a total amount of execution exceeding 55.7 billion yuan. In addition, there are multiple records of consumption restrictions, dishonest persons, and final cases.

Since the second half of 2021, Evergrande has been facing significant debt risks, and its financial pressure has been difficult to ease over the past two years. As of the end of June this year, its debt reached 1.78 trillion yuan after excluding contracted liabilities, involving a large amount of borrowings and payables, with a net asset liability of 644.2 billion yuan. According to incomplete statistics, Evergrande currently has 1.6 million unfinished properties nationwide, which represents 1.6 million households and nearly 5 million people. The regulatory authorities have given Hui time, perhaps to allow him to deliver as many properties as possible.

(This article was first published on the TMTPost App, author | Wang Jian)