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China's Evergrande proposes bond amendments to take on much more debt
February 28, 2017 / 6:39 AM / 9 months ago

China's Evergrande proposes bond amendments to take on much more debt

* Seeks more flexibility to invest, declare dividends

* Rating agencies say changes would improve capital structure

* But would also increase Evergrande’s leverage

By Clare Jim

HONG KONG, Feb 28 (Reuters) - 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 $25 million.

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)

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