Embattled China Evergrande warns of cross-default, liquidity crunch

© Reuters. People gather to demand repayment of loans and financial products at the Evergrande's headquarters, in Shenzhen, Guangdong province, China September 13, 2021. REUTERS/David Kirton

By Clare Jim

HONG KONG (Reuters) -Cash-strapped China Evergrande Group warned on Tuesday of a risk of cross-default as property sales continued to plunge, intensifying pressure on the developer, which has swiftly become the country's biggest corporate headache.

The group has been scrambling to raise funds it needs to pay its many lenders and suppliers, with regulators and financial markets worried that any crisis could ripple through China's banking system.

In the latest development, Evergrande said two of its subsidiaries had failed to discharge guarantee obligations for 934 million yuan ($145 million) worth of wealth management products issued by third parties.

That could "lead to cross-default", which would "would have a material adverse effect on the group's business, prospects, financial condition and results of operations," it said in a statement to the Hong Kong stock exchange.

The company's shares slumped in Hong Kong on Tuesday and the Shanghai bourse halted trading of its listed bonds amid wild swings in its price.

Evergrande added it has engaged financial advisers, signalling a speed up of any restructuring plans.

The developer said Houlihan Lokey (NYSE:HLI) (China) Limited and Admiralty Harbour Capital Limited will assess the group's capital structure, evaluate its liquidity, explore solutions to ease the current liquidity issue and reach an optimal solution for all stakeholders as soon as possible.

The group is also talking to potential investors to sell some of its assets, but it has made no "material progress" so far, it added.

Evergrande said earlier this month that it was in talks to sell certain assets, including stakes in Hong Kong-listed units Evergrande New Energy Vehicle and Evergrande Property Services.

Pressure on Evergrande - which has 1.97 trillion yuan ($305 billion) in liabilities - has intensified in a matter of weeks as fears over its ability to repay investors trigger mounting protests that are certain to rattle Beijing.

The company blamed "ongoing negative media reports" for dampening investor confidence, resulting in a further decline in sales in September.

Shares of the company fell nearly 9% early on Tuesday to their lowest since July 2015, on course for the second session of decline. Stock of its e-vehicle group plunged as much as 19.8%, while shares of its property management unit dropped 5.9%.

Evergrande's June 2025 dollar bonds fell more than 5 cents on Tuesday morning to under 28 cents, according to financial data provider Duration Finance. Moves in the company's onshore bonds, which are highly illiquid, were more erratic, with one Shanghai exchange-traded bond surging nearly 23% and triggering a trading halt, while another bond in Shenzhen dived almost 12%.

Angry investors gathered around Evergrande's headquarters in the southern Chinese city of Shenzhen on Monday to demand the firm repay loans and financial products.

The protest comes amid worries the country's most indebted developer will be unable to repay investors and that its debt woes could pose systemic risks to China's financial system.

The developer's struggles to quickly sell off assets and avert defaulting on its massive liabilities is raising the risk of contagion for other privately-owned developers, fund managers and analysts say.

Evergrande late on Monday said online speculation about its bankruptcy and restructuring was "totally untrue".

In a statement, it said it was facing "unprecedented difficulties" but would do everything possible to resume work and protect the legitimate rights and interests of its customers.

The company's debt has been repeatedly downgraded by ratings agencies targeting the developer over its struggles to restructure huge debts.

($1 = 6.4511 Chinese yuan)