China Evergrande offers bond and equity swaps in debt restructuring

China Evergrande Group on Wednesday announced plans for the restructuring of its US$22.7 billion (about RM101 billion) in offshore debt, which could set a template for distressed rivals and shape investor sentiment on the country's embattled property sector.

The world's most indebted property developer gave creditors a basket of options to swap their debt into new bonds and equity-linked instruments backed by the group and its two Hong Kong-listed companies, Evergrande Property Services Group and Evergrande New Energy Vehicle Group.

With more than US$300 billion in total liabilities including offshore debt, Evergrande has been at the centre of a property debt crisis in which multiple Chinese developers defaulted over the past year, forcing many to enter debt restructuring talks.

While the long-awaited proposals could provide breathing space for the developer that was teetering on the brink of collapse a year ago, few analysts expect its balance sheet to recover fully any time soon.

"The proposed restructuring will alleviate the company's pressure of offshore indebtedness and facilitate the company's efforts to resume operations and resolve issues on shore," Evergrande said in the filing.

The developer expects the proposed restructuring to facilitate an orderly resumption of business operations and gradual generation of cash flow for debt repayment.

Court and arbitration cases involving US$52.83 billion of debt are ongoing in mainland China, Evergrande said. On a standalone basis, these will not materially affect the offshore restructuring, it added.

In the two main options proposed, creditors can either swap all of their holdings into new notes with maturities of 10-12 years, or convert them into different combinations of new notes of five to nine years and equity-linked instruments.

The developer said it expects to agree restructuring support agreements with different groups of bondholders by March 31, with restructuring taking effect on Oct 1.

Evergrande on Monday said that a key bondholder group had agreed to its proposed terms. It also said the company expects its overdue financial reports for 2021 and 2022 to be released in April and May.

Trade in its Hong Kong shares has been suspended since last March, pending release of the financial statements, and Evergrande said in Wednesday's filing that it will remain suspended until further notice.

Evergrande also gave an update on its business on Wednesday, saying that additional financing of ¥250 billion to ¥300 billion will be required as it resumes operations over the next three years.

"As a result, the company’s ability to repay unsecured debt... is relatively weak, it said, adding that free cash flow is expected to increase gradually from the fourth year, assuming the company can resume normal operations.

Regarding its electric vehicle business, which some new notes will be linked to, Evergrande said it may have to be shut down unless it obtains new funding.

Sidley Austin and Houlihan Lokey are Evergrande's advisers, while Moelis & Company and Kirkland & Ellis are advising the group of bondholders.