China Evergrande (HKG: 3333) shares are down 24% this morning. The drop is as a result of news over the weekend. That debt restructuring they were about to go through, the one that had been boosting the stock since relisting? It’s not now going to happen. Or, at least, it’s now not going to happen now and upon the terms they’d been thrashing out.
Now, it is theoretically possible that things have got better and therefore they can gain better terms from the restructuring. But while theory can contain every possibility this is not what is actually happening: “China Evergrande Group canceled key creditor meetings that had been set for early next week and said it must reassess its proposed restructuring, adding further uncertainty to what would be one of the nation’s biggest ever restructurings.
The distressed developer cited sales that have “not been as expected,” in scrapping the so-called scheme meetings that had been planned for Sept. 25-26, in an exchange filing Friday night.”
So, there’s been a deterioration already from the level of sales that they were including in their restructuring proposals. That’s not a good sign. Especially as reports from real estate agents have been that the changes of the past couple of weeks have sped up the market, sales are now closing and so on.
China Evergrande stock price from Google Finance
The basic problem here is that without a debt restructuring the company is bust. As we’ve said before about China Evergrande: “Evergrande is at the centre of a real estate market crisis threatening the world's second largest economy. On Sunday, the firm posted a 33bn yuan ($4.5bn; £3.6bn) loss for the first six months of the year.” Even at 99% down it’s possible to view the shares as expensive. On the grounds that no one really believes China Evergrande is going to survive long term without some considerable capital restructuring. “Evergrande incurred a combined loss of $81 billion during 2021 and 2022, according to a long overdue financial report posted last month. Its challenges are not over. Evergrande is still laden with liabilities worth 2.39 trillion yuan ($328 billion) by the end of June. That’s just slightly lower than the 2.44 trillion yuan ($334 billion) in total liabilities it reported at the end of last year. Its total assets also declined to 1.74 trillion yuan ($239 billion) from 1.84 trillion yuan ($253 billion).””
#Without being able to restructure that debt load there’s little to no hope. Weirdly, the American quote is moving the other way, EGRNF is up. But as has been true for a long time now that’s a matter of very thin liquidity on the OTC.
Everyone’s assumption is that Evergrande will muddle through to some sort of settlement. But such assumptions can be wrong, of course they can.
