Secretive Group of Holdout Creditors Is Key to Evergrande’s Fate

A large but secretive group of creditors is emerging as one of the last major roadblocks to a historic restructuring of China Evergrande Group.

(Bloomberg) — A large but secretive group of creditors is emerging as one of the last major roadblocks to a historic restructuring of China Evergrande Group.

Identified only as “Class C” creditors by Evergrande, the group is the second-biggest of its kind with $15 billion of claims — and among the only two that didn’t provide sufficient backing for the troubled developer’s debt plan based on its last public disclosure. Evergrande, which has about $328 billion of liabilities, will have to win them over at key creditor meetings on Sept. 25-26 as it tries to avoid a liquidation.

Still at the epicenter of China’s property crisis, Evergrande is under pressure to finalize a blueprint for what is set to be one of the country’s most complex debt restructurings. The Class C creditors pose a particular challenge, with their wide variety of borrowings and the prevalence of private debt making it hard for outsiders to identify the members and assess their attitudes.

“Failing to gather enough support for the Class C might drag the whole restructuring process,” said Zerlina Zeng, senior credit analyst with CreditSights. “We expect the debt restructuring of Chinese developers with a large amount of unfinished home projects such as Evergrande to be lengthy and with large uncertainties.”

Evergrande, the world’s most indebted developer, has left investors in the dark about the support level from Class C creditors since April, when it disclosed that those holding more than 30% of that category of debt have endorsed the debt plan, according to people familiar with the matter who requested anonymity discussing private information. 

That figure is far below the 75% needed from each creditor class to implement restructuring through what’s known as a scheme of arrangement. 

Class C support is crucial as it’s one of two classes under China Evergrande Group’s own scheme – the dominant part of the overall debt plan. The other one, labeled Class A and accounting for $17 billion of claims, already delivered a support level of over 77% as of the April filing.

Evergrande Units

The company’s restructuring also includes two other schemes which cover debt owed by units Scenery Journey Ltd. and Tianji Holding Ltd. Evergrande’s group-level scheme can go ahead without creditor approval for the units, according to people familiar with the matter. 

The two units’ own schemes, however, are dependent on each other’s success in securing creditor approval, they added, asking not to be identified speaking on private discussions.

Scenery Journey had a support level of more than 91%, while Tianji delivered more than 64% as of the April filing.

Evergrande didn’t immediately offer comment when reached by Bloomberg News. 

The Class C creditor group is under close scrutiny both because of its weight and the diverse and often opaque nature of lending it has provided to Evergrande over the years. It comprises 14 debt obligations, ranging from offshore guarantees for creditors of onshore borrowings to margin loans, and repurchase obligations tied to bets on a yet-to-materialize stock listing by the builder’s online home and car sales platform.

Little is known about the identities of the group’s members. 

One of their debt claims is a $712 million item marked as Evergrande’s repurchase obligation for FCB Group, the online home and car sales unit also known as Fangchebao. Evergrande raised HK$16.4 billion ($2.1 billion) selling a stake in 2021 ahead of a planned U.S. listing for the unit, with the investors holding 10% after the sale. 

Top Shine Global Limited of Intershore Consult (Samoa) Ltd., a strategic investor that participated in Evergrande’s stake sale, filed a winding-up petition against the developer more than a year later. Based on the original arrangement, Evergrande’s online unit is required to repurchase the shares with a 15% premium if it doesn’t complete an IPO within 12 months of the stake sale.

The clock is ticking for Evergrande to secure backing for its restructuring plan. After the creditor vote next week, it will face a hearing at a Hong Kong court of the winding-up petition scheduled on Oct. 30. 

Failure by Evergrande to carry out a comprehensive debt overhaul will likely send ripples through China’s $60 trillion financial system and further weaken investor confidence in the housing sector, where a crackdown on financial leverage and three years of strict Covid controls have triggered record waves of defaults.

The developer’s crisis is entering a new phase, now that authorities have detained some staff of its money management unit. The detentions come as China started a campaign against illegal fundraising to protect consumers.

Below are some of Evergrande’s key events to watch:

–With assistance from Dorothy Ma.

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