China Evergrande Group’s USD20 billion debt restructuring plan is at risk of falling apart as Founder Hui Ka-yan was put in police custody, blocking his ability to do business deals. Hui and his offshore family vehicle Xin Xin (BVI) are sponsors of the restructuring agreements with a committee of foreign creditors, including global hedge funds and distressed-debt investors. The situation also raised question marks over access to his assets to pay legal advisers and creditors.
Hui, who turns 65 on October 9, has been placed under “mandatory measures” by Chinese authorities for unspecified crimes, the troubled developer said in a filing on September 28. The term typically refers to house arrest or movement surveillance, among other things. “In general, the restructuring proposal needs approvals and signatures of key people in charge,” said Raymond Cheng, Managing Director of CGS-CIMB Securities in Hong Kong. As the number one person in Evergrande, “the fact Hui’s missing will definitely have a huge negative impact on the restructuring process.”
Hui and Xin Xin are sponsors of the restructuring support agreement with China Evergrande’s class A creditors, who held USD14.2 billion of claims tied to 10 defaulted U.S. dollar-denominated bonds, one Hong Kong dollar convertible bond, and one private loan. Hui separately is also a sponsor of another restructuring agreement with creditors with claims against China Evergrande as guarantor for USD5.23 billion of bonds sold by its offshore unit Scenery Journey and other yuan-based options and obligations. Offshore creditors holding 77% and 91% of those debts, respectively, have given their consent to the restructuring terms based on the most recent update in April. They may serve a 10-day notice to withdraw their support, according to the support agreements.
Apart from his controlling equity stake in China Evergrande, and indirectly its two other listed vehicles, Hui’s personal assets include USD600 million worth of the company’s defaulted bonds. He is also listed as the owner of Event, a 60-meter luxury super yacht valued at USD60 million. The yacht was sold earlier this year for about USD32 million as part of a process to sell down non-core assets. Hui agreed in March to pay the committee representing its offshore creditors a “work fee” and retained Baker McKenzie as his counsel in the restructuring process. The law firm did not reply to emails seeking comment to find out if it was still advising Hui following his “arrest”.
Evergrande’s Hui was last heard from in a voice clip circulated – and verified – by the company last December, in which he instructed his executives to speed up construction to ensure that homes under contract are delivered to customers. He last signed off the company’s exchange filings in Hong Kong on September 24. Apart from Hui, several current and former executives in the group have also been detained by police. Evergrande also asked for the suspension of trading in its shares, as well as shares of Evergrande Property Services and China Evergrande New Energy Vehicle Group, without giving a reason. Trading in the three stocks would remain halted until further notice. The trading halt came a month after the group emerged from a 17-month suspension. The company and its subsidiaries had a combined market capitalization of HKD16.7 billion on September 27, a decline of nearly 80% in their value before they resumed trading in August.
“Hui’s legal issues are not good news for creditors, but neither do they represent the ultimate failure of the restructuring process,” said Brock Silvers, Managing Director at Kaiyuan Capital in Hong Kong. Taking the rescue of HNA as an example, Silvers said Chinese authorities seem to be following an established playbook of allowing companies fairly significant leeway to resolve leverage and risk issues, and only replacing management once patience has been exhausted. “At this point, liquidation probably represents the worst outcome for all parties,” he said. “It’s hardly a forgone conclusion,” the South China Morning Post reports.
