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Evergrande chairman detained at undisclosed location

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2023-09-28

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Shares of China Evergrande, the beleaguered property developer, tumbled on Wednesday following a Bloomberg report revealing that its chairman had been detained by Chinese authorities over a month ago and was currently 'being held' at an undisclosed location in China.

The news caused the shares to drop significantly, going from a modest 1% gain in early trading to a substantial 19% decline, closing at 32 Hong Kong cents by the end of the trading day in Hong Kong.

Interestingly, investors in both Hong Kong and mainland China seemed to disregard the dramatic news, pushing the broader market higher, albeit for no apparent reason.

Market commentators anticipate minimal activity over the next ten days as China approaches its Golden Week/National Day/Mid-Autumn Festival, which commences this Friday.

The detention of Evergrande's chairman is the latest in a series of worsening news reports and leaks, seemingly propelling Evergrande towards a potential implosion, with its staggering $US300 billion debt appearing insurmountable.

Analysts in Hong Kong remarked that what was intended to be a 'stabilizing' event for China's weakened property sector has 'gone off the rails,' with Wednesday's news of police and security authorities' involvement potentially becoming a deal-breaker.

Earlier on Wednesday, Reuters reported that some of Evergrande's offshore creditors plan to join a winding-up court petition against the embattled developer if it fails to submit a new debt restructuring plan by the next month.

Evergrande's offshore debt restructuring involves nearly $US32 billion of bonds, collateral, and repurchase obligations, making it one of the world's largest financial restructurings (a potential windfall for lawyers and accountants).

The revelation of the chairman's detention will likely increase the pressure on offshore creditors to secure a liquidation judgment from a foreign court to safeguard their interests.

Meanwhile, another distressed developer, China Oceanwide, is now facing a Bermuda court decision mandating the company's winding up. The court has appointed joint provisional liquidators after rejecting its restructuring proposals.

Evergrande has filed for Chapter 15 bankruptcy in a New York court, seeking recognition of restructuring arrangements pursued in the High Court of Hong Kong and the High Court of the Eastern Caribbean Supreme Court in the British Virgin Islands.

The chairman's detention revelation followed Evergrande's main domestic arm, Hengda Real Estate Group, announcing on Monday to the Shenzhen stock exchange that it had failed to pay the principal and interest for a 4 billion yuan ($US547 million) bond due by September 25.

This development came after Evergrande disclosed over the weekend that it was unable to issue new debt due to an ongoing investigation into Hengda, causing Evergrande's share price to plummet by 22% on Monday.

In a filing the previous Friday, Evergrande disclosed that weak sales since its March restructuring plan had raised concerns about its finances and the viability of the plan.

However, it was the Bloomberg News report about Evergrande's chairman that proved to be the most damaging. According to sources, Bloomberg reported that Hui Ka Yan, who founded Evergrande in 1996 in southern Guangzhou city, was taken into custody by police earlier this month and is currently under residential surveillance at a designated location. The report clarified that while the reasons for Hui's placement under residential surveillance remain unclear, this action falls short of formal detention or arrest and does not necessarily imply that Hui will face criminal charges.

Late on Wednesday, another major Chinese developer, Country Garden, grabbed investor attention as they learned about a new bond coupon repayment deadline on Wednesday. The outcome of this deadline is not yet known.

The $US40 million coupon, with a 30-day grace period, is associated with an 8% $US1 billion bond set to mature in January. Country Garden has already successfully secured three-year payment extensions for at least seven of its eight bonds in the past month.

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