Market flinches as China Evergrande chair exits troubled real estate unit

Billionaire Hui Ka Yan has stepped down as chair of China Evergrande’s onshore unit as the real estate group continues to reel from funding troubles.

Hui is no longer chair of Hengda Real Estate, according to the website of the government-run national enterprise credit information publicity system. Zhao Changlong was named in the role at the unit, which oversees Evergrande’s property operations and houses its main real estate assets in China.

The move, unveiled on a corporate information platform not typically used for company announcements, triggered declines in Evergrande shares and bonds. The market reaction underscored how sensitive investors have become to any signs of upheaval at the world’s most indebted developer as it attempts to stave off a cash crunch.

The change in chair of Hengda Real Estate is normal after a decision not to a pursue backdoor listing on China exchanges, Evergrande said in a response to Bloomberg, adding there is no change to the management structure and shareholding.

With the move, Hui handed back the role to Zhao, who led the company before it sought an A-share listing. Hui became Hengda’s chair in November 2017, after Hengda introduced 130-billion yuan ($20bn) from strategic investors with a clause that he shares repurchasing responsibility should the listing fail. The plan, which involved selling Hengda to a Shenzhen-listed shell company, was aborted last November.

“Whatever the reason, a change of chairman is not a good signal in the eyes of the market,” said Ma Dong, partner of Chinese local private bond fund BG Capital. “At a time when Evergrande needs to stabilise market sentiment, Hui’s role change will lead to more investor anxiety.”

The timing of the move, coming many months after the backdoor listing was abandoned, and as Hui looks to dispose of assets, unnerved some investors. Shares of Evergrande fell 4.3% in Hong Kong trading on Tuesday, taking this year’s decline to 65%. The 8.75% note due in 2025 dropped 2.4c on the dollar to 39.4c, on pace for its lowest-ever close.

Hui remains chair of the conglomerate, and his departure from Hengda does not necessarily mean he will give up the role, according to Bloomberg Intelligence analysts Patrick Wong and Lisa Zhou. “China Evergrande Group’s overall business management may not significantly change in the short term,” they wrote.

The government has been pushing to curb Evergrande’s borrowing in hopes of putting a stop to the notion that any company can be “too big to fail”. With more than $300bn of liabilities, Evergrande’s fate has broader implications for China’s $50-trillion financial system and the nation’s banks, trusts and millions of homeowners.

Curbed by China’s “three red lines” that determine whether companies can take on additional debt, Evergrande has been spinning off and selling assets. It has offered steep discounts and relied on commercial bills as payments for suppliers to cut down on debt.

Evergrande’s woes escalated last year when it faced $19bn in payments if it failed to meet a promise to achieve the backdoor listing for its main property assets in China by the end of January. That sparked concern about cross defaults in its widely held debt securities, triggering fears of systemic risks.

The company skirted the crisis with the help of wealthy friends and the government. Strategic investors agreed to waive their right to force most of the repayments by the property firm, while the local government of Guangdong stepped in to help stabilise the situation, people familiar with the matter said at the time.

Trouble began brewing again this year as Evergrande shrank its borrowings in line with demands from policymakers, while delaying payments to suppliers who started to take their disputes over IOUs public. Some sought asset freezes. Evergrande’s bonds were also repeatedly downgraded by ratings agencies. A small city government temporarily banned it from selling property, alleging that the company failed to set aside enough funds in escrow accounts.

Guangdong has once again been called on to help, with the central government telling authorities in the province to map out a plan to manage the developer’s debt, people familiar with the matter said last week.

Potential sources of future funding for Evergrande include placements for its listed electric vehicle and property management units, and initial public offerings for operations including its beverage business, FCB, and amusement park and tourism properties, Fitch Ratings has said.

The Shenzhen-based developer has about $80bn worth of equity in non-property businesses that could help generate liquidity if sold, Agnes Wong, a Hong Kong-based analyst with BNP Paribas, wrote in a June report.

Analysts have already been on the lookout for possible changes in senior management at Evergrande, with Citigroup credit strategists saying they could signal Beijing is taking a tougher stance on the company than in previous liquidity crises.

“Forced asset sales, or forced changes in management, may give some indication that the government will be more forceful in dealing with the company,” Citigroup strategists led by Eric Ollom wrote in a note last week.

Bloomberg News. More stories like this are available on bloomberg.com