* Seeks more flexibility to invest, declare dividends
* Rating agencies say changes would improve capital
* But would also increase Evergrande's leverage
By Clare Jim
HONG KONG, Feb 28 China Evergrande Group
said it is asking creditors to approve amendments to
its bond covenants to allow the country's top homebuilder to
take on billions of dollars of additional debt, as it paves way
for a Shenzhen backdoor listing.
Evergrande, China's most indebted developer, seeks to amend
some covenants on four notes due in 2018 to 2020
that will allow for the issuance of new
capital to strategic investors.
The firm last month sold 13.16 percent of the enlarged
shares in a property subsidiary to eight investors for a total
of 30 billion yuan ($4.32 billion), as part of its China
backdoor listing plan.
"(The proposed amendments seek) to provide us with more
flexibility in ... pursuing investment opportunities that suit
our business development strategies, including to facilitate the
proposed reorganization," the developer said in a consent
solicitation document seen by Reuters late Monday.
The amendments include lowering the fixed charge coverage
ratio requirement, which measures a firm's ability to pay all of
its fixed charges with its income, to 2.5 times from 2.75. The
firm also proposed an increase in the size of the purchase money
indebtedness basket to 40 percent of total assets, valued at 1
trillion yuan as of the end of June, from 35 percent.
In addition, the revisions would increase the permitted
investment basket to 25 percent of total assets from 20 percent.
It would also lift the thresholds for affiliate transactions
that require board resolutions to $25 million from $5 million,
and trustee resolutions to $50 million from $10 million.
Related to the 30 billion yuan strategic investment
injection, proposed amendments would also permit the developer
to declare dividends to certain strategic investors, and raise
the buffer of the restricted payment basket to $75 million from
Bondholders will in return get a $3.50 consent fee for each
$1,000 in principal amount of the notes, which have traded
relatively flat in the past few days. The consent solicitation
will expire on March 10.
Rating agencies said the proposed amendments would improve
Evergrande's capital structure, but they would also relax some
limitations on debt, investments, and guarantees, resulting in
greater cash outflows and higher leverage.
"They keep getting funded by Chinese banks but once that
stops, it could be worrisome," said a Hong Kong-based credit
analyst. "Once you start factoring their perpetual bonds as debt
it will start looking unsustainable."
This is not the first time the company sought to amend its
bond covenants. It has previously gone through the same practise
twice in 2014 and 2016 on existing bonds to raise indebtedness
ratios, which both have been approved by bondholders.
($1 = 6.8688 Chinese yuan renminbi)
(Additional reporting by Umesh Desai; Editing by Randy Fabi)