Embattled Billionaire Hui Ka Yan Can’t Reach A Deal With Evergrande’s International Creditors

Hui Ka Yan has made repeated pledges to pay down China Evergrande Group’s more than $300 billion in total liabilities, but the embattled tycoon is still nowhere close to finalizing a deal with international creditors even though the company faces a winding-up hearing in less than two weeks.

The 64-year-old sent senior executives to meet with an ad-hoc group of offshore debt holders in Hong Kong about a week before the Lunar New Year holiday in late January, but in the months that followed, the two sides still have yet to agree on key terms for a much-anticipated restructuring deal, according to people with knowledge of the discussions.

Although Evergrande had previously said it expects to gain the support of debt holders, the gap between the parties has, in fact, become even wider. International creditors, who are owed about $20 billion, want faster and larger cash repayments in light of the apparent signs of a nascent recovery in China’s real estate market. But Evergrande, which has already missed a self-imposed deadline to unveil its restructuring plan by the end of last year, is unwilling to sweeten its offer. Some of the company’s proposed bond repayments come with terms that stretch for as much as 12 years, one person said.

Evergrande still needs to conserve valuable cash for other purposes. It is said to be under considerable pressure to repay onshore creditors and finish construction of its presold housing projects. The company is at the epicenter of China’s sprawling real estate crisis, which had even seen some angry homebuyers boycotting mortgage payments of presold but unfinished homes. At China’s national parliament meetings currently taking place in Beijing, officials have once again stressed the need to manage risks tied to the real estate sector, and ensure that homes are delivered to their respective buyers.

“There are important unresolved concerns regarding seniority, particularly with regard to onshore creditors, which is precisely where Evergrande is likely to be constrained,” says Brock Silvers, Hong Kong-based managing director of investment firm Kaiyuan Capital.

An Evergrande representative declined to comment. Investment bank Moelis & Company and law firm Kirkland & Ellis, which represent the ad-hoc group of creditors, also declined to comment.

Evergrande, in the meantime, has been trying to compensate bond investors through means that wouldn’t require cash payments. For example, the company had proposed to let them convert their debt holdings into minority stakes in its Hong Kong-listed electric car and property management units, according to people familiar with the matter, but many view the offer as being less attractive.

Other than sharp disagreements over valuation, creditors are said to be concerned about potential governance risks. Last year, a number of senior Evergrande executives had to step down after it was discovered that $2 billion worth of cash holdings owned by the Hong Kong-listed property management unit had been seized by banks. Evergrande Property Services had used the cash deposits as collaterals for loans, which were eventually transferred back to parent Evergrande through various intermediary companies. Banks seized their collateral after Evergrande Property Services failed to pay back the loans.

In spite of the lack of progress toward reaching an agreement, analysts say Evergrande is unlikely to be liquidated at this stage because it needs to continue operating in order to meet the government’s aim of ensuring that all presold projects are delivered to homebuyers. The company is already facing a winding-up hearing in Hong Kong on March 20, after one creditor filed a petition to liquidate the company so that its assets can be distributed to repay creditors. Evergrande is aiming to present some restructuring terms to the court in order to seek another adjournment, according to a Reuters report, citing anonymous sources.

“I don’t think Evergrande will be liquidated and then go bankrupt,” says Yan Yuejin, director of the Shanghai-based E-house China Research and Development Institution. “If companies like Evergrande are allowed to go bankrupt now, purchasers of their homes would panic.”

This means that negotiations with international creditors may well drag on, and any deal would understandably take a lot longer to cut than the recent restructuring of China Fortune Land or that of billionaire Sun Hongbin’s Sunac China Holdings, which had just received support from major offshore debt holders after defaulting on a dollar bond last May.

And a final deal will likely involve Hui using more of his own funds to make some of the payments. Hui’s net worth now stands at $3 billion after he had used at least $1 billion of his personal funds to pay down some of Evergrande’s debt.

“I think it is extremely likely that any negotiated settlement will include some contribution from Hui,” says Kaiyuan Capital’s Silvers. “I assume that creditors view this as proper, given Hui’s enrichment despite his obvious mismanagement of the company.”