Evergrande’s Restructuring Plan For Offshore Debt Still Carries Considerable Risks For Creditors

China Evergrande Group has unveiled its plan to restructure about $19 billion of offshore debt, buying more time for its billionaire founder Hui Ka Yan to resume operations and generate much-needed cash. But analysts say the plan lacks details and offers less-than-favorable terms for creditors.

Holders of offshore debt in the Hong Kong-listed company are to receive a basket of options, according to a late Wednesday filing to the city’s stock exchange. The bondholders can either swap their debt for new notes with maturities of 10-12 years, or they can convert them into new notes with repayment terms of five to nine years combined with equity-linked instruments. The instruments will be tied to the shares of Evergrande itself, its property management business or its Hong Kong-listed electric car unit.

“The proposed restructuring will alleviate the company’s pressure of offshore indebtedness and facilitate the company’s efforts to resume operations and resolve issues onshore,” Evergrande writes in the filing. “The company will use its best endeavors to restore a healthy ecosystem of capital and business, repair its capital structure and stabilize its business operations.”

Evergrande’s filing says creditors are expected to agree to the terms of the restructuring plan by the end of the month, so that the deal can be implemented starting from October 1, but analysts say the negotiated terms are still far from being attractive.

“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, ” says Shen Meng, managing director of Beijing-based boutique investment bank Chanson & Co.

Evergrande says it has already secured preliminary support from debt holders, which would in theory allow it to avoid a court-ordered liquidation of assets, a scenario that would have likely resulted in offshore creditors taking a steep haircut of up to 98%, according to a preliminary analysis cited in the filing. It says some unsecured creditors of the company’s offshore bonds can only recover 2.05% of what they had initially invested. A petition to wind up the company has now been adjourned until July 31.

But converting debt holdings into equity interests still puts creditors on a precarious footing. “Judging by the crowded field of players in China’s electric car market, even companies with sufficient funding will have a quite limited chance of success,” Shen says.

Evergrande New Energy Vehicle Group, for its part, has managed to deliver more than 900 vehicles to date, according to the filing, which also contains updates on various parts of Hui’s once sprawling business empire. But it has also taken cost-cutting measures including laying off almost a thousand employees over the past year, and will “face the risk of shutdown” without new funding, the filing warns.

As for parent Evergrande itself, the focus for the next three years is ensuring delivery of properties, resuming work and production, as well as maintaining an “orderly expansion,” it says in the filing. To complete these tasks, Evergrande estimates that an additional 250 billion yuan to 300 billion yuan ($44 billion) in financing is needed.

Brock Silvers, a Hong Kong-based managing director of investment firm Kaiyuan Capital, says the funding gap “speaks to a business model that appears incapable of supporting even the company’s restructured indebtedness.” An Evergrande spokesperson didn’t respond to requests for comment, and Evergrande itself didn’t elaborate in the filing where or how it intends to get new financing.

The company, however, says it will use unlevered free cashflow generated from existing projects for repayment of any additional financing obtained. It says that starting from the fourth year, unlevered cash flow may reach up to $22 billion on an annual basis, provided that normal operation is resumed.

Evergrande is also silent on other key details, including whether Hui will use his personal fortune to repay creditors. Debt holders had reportedly asked the billionaire to put in at least $2 billion, although they recently walked back that requirement, according to a person with knowledge of the matter.

“The announced restructuring also remains silent on any immediate payment to bondholders, or any capital injection from Chairman Hui Ka Yan,” says Silvers. “Pending the restructuring details, it’s hard to see any creditor gains or lessened risks. Creditors should need substantial inducement in order to accept new notes with a 10-12 year tenor, as Evergrande continues to represent a very significant credit risk. ”