Evergrande plans to restructure $19 billion of debt

China Evergrande has laid out a debt-restructuring plan for its offshore creditors. The pain for its long-suffering debt investors isn't over yet.

The owners of other offshore property debt are warned of that. Many investors piled into bonds on the assumption that Beijing would never allow a truly widespread property bust because of the fraught politics of homeownership in China. That assumption proved to be wrong, and now they are likely to pay a steep price.

Evergrande plans to restructure $19 billion of its offshore debt on Wednesday were unveiled by Evergrande. Creditors can choose between swapping their bonds into new notes with a tenor of 10 to 12 years or accept a combination of new five to nine-year bonds and securities that could convert into shares of Evergrande and its two Hong Kong-listed units, including its property management unit.

Neither option is particularly attractive. Evergrande can choose to pay the coupons on the bonds with more bonds. It can choose to do it partly because of the bonds that are offered for the other option. That is also highly uncertain.

Evergrande's listed electric-vehicle unit is essentially just another property developer with a nominal EV business -- it has delivered only some 900 cars so far. If it doesn't get additional funding of $4.3 billion, the EV company warns it may stop production.

Evergrande's Hong Kong shares and both other listed units have been suspended for about a year after failing to file financial reports on time.

Evergrande is a different story, as China's real estate market is starting to recover, and it needs additional funding of $37 billion to $44 billion over the next three years, and all cash flow generated will be needed to repay new debt and finish already sold apartments.

CHINA EVERGRANDE But creditors probably won't have a better option. Evergrande owns a lot of assets outside of mainland China, so the stakes in the two listed companies are some of the more valuable assets in the two listed companies. According to a Deloitte analysis, the recovery values of existing offshore bonds are only 2% to 9% of principal in the case of liquidation. Such a low recovery rate isn't unexpected. Evergrande s dollar-denominated bonds have been trading below 10 cents on the dollar for quite a while.

The problem is that most of Evergrande's assets are in the onshore operating company, which also has its own debts. Offshore creditors were lending to the holding company and would rank lower than those onshore creditors. Evergrande had over 613 billion yuan of onshore liabilities at the end of 2021 and about 141 billion yuan of offshore liabilities.

Evergrande's restructuring plan could be used as a template for other beleaguered Chinese developers with a lot of offshore debt such as Sunac and Kaisa. In the case of Evergrande, offshore investors lent to an offshore holding company rather than the onshore entities holding assets.

That means that they could end up last in line for repayment. The long-term damage to Chinese companies ability to borrow offshore may be large, but foreign creditors are still holding the bag.