Embattled Evergrande sells part stake in Shengjing Bank for 10 billion yuan as more repayment deadlines approach

Embattled property developer China Evergrande Group is selling part of its stake in Shengjing Bank in northeastern China to raise nearly 10 billion yuan. The homebuilders is said to have asked for more time to service a second offshore bond in as many weeks amid a cash squeeze.

The developer signed an agreement to sell 19.93 per cent of Shengjing Bank for just under 10 billion yuan ($1.55 billion) to a state-owned company Shenyang Shengjing Finance Investment Group, according to a filing to the Hong Kong Stock Exchange on Wednesday.

The sale will reduced Evergrande’s stake in the non-public shares of the lender to 14.6 per cent. All the net proceeds from the deal will be used to settle the developer’s liabilities with the lender, according to the filing.

The transaction represents the latest asset sale by the homebuilder to prevent itself from collapsing, after it missed several interest payments this month to contractors, suppliers and creditors. More deadlines are approaching on its onshore and offshore bond repayment obligations.

The company has not paid the semi-annual interest on a US dollar-denominated bond maturing in September 2024 due on Wednesday as of 3pm Hong Kong time, according to a person close to some bondholders.

In the past few months, Evergrande sold off a variety of assets, including 25.17 billion yuan in property and a smaller stake in Shengjing Bank, to pay obligations its suppliers and contractors and improve its cash flow. Shares of Shengjing Bank were suspended from trading on Wednesday for the announcement.

On the same day, Fitch Ratings downgraded its long-term foreign-currency issuer rating for Evergrande and its subsidiaries deeper to “C”, which reflects a company is “near default”.

“The downgrades reflect that Evergrande is likely to have missed interest payment on its senior unsecured notes and entered the consequent 30-day grace period before non-payment constitutes an event of default,” Fitch said. It marks the fourth downgrade of Evergrande rating by Fitch since June 22.

“Although uncertainty still exists regarding this company’s fate, we believe the market’s base case (according to current pricing of its bonds) is likely a default,” Manulife Investment Management said in a report on Tuesday. “The nature of the potential default should then be a key driver of China’s real estate sector outlook, which should evolve over time.”

Evergrande faces four interest payment deadlines in the coming weeks on its dollar bonds, according to its recent interim reports, including a 9.5 per cent bond with $951 million that matures in March 2024. Coupons on another three bonds with a total face amount of $3 billion are also due next month. They typically come with a 30-day grace period.

The sale of the bank’s shares had been rumoured since July, when Shengyang vice-mayor Gao Wei encouraged local state-owned companies to increase their stakes after a meeting with bank executives and financial regulators.

Gao said at the time that the municipal government valued reforms in Shengjing Bank and would strengthen the Communist Party leadership in the bank to help it develop into a good bank.

Evergrande had earlier sold a 1.9 per cent stake in Shenging Bank for 1 billion yuan as part of a series of asset sales between the end of the first half of this year and August 27.

The distressed developer earlier this month hired outside financial advisers to tackle its debt burden, after depleting its cash resources, as China began clamping down on leveraged developers to stem financial risks. The group and other industry peers have been shut out of banks after failing to comply with the “three red lines” rules imposed in August last year.

The group had 572 billion yuan of borrowings on June 30, including 394 billion yuan in bank loans and the rest in onshore and offshore bonds. Together with payables, they made up the bulk of its 1.97 trillion yuan of liabilities.