Evergrande Says Banks Have ‘Enforced’ $2.1B of Property Service Unit’s Assets

Indebted developer China Evergrande said Monday that RMB 13.4 billion ($2.1 billion) in assets had suddenly disappeared from the balance sheet of its property services unit, with the company joining a parade of Hong Kong-listed mainland property firms delaying the release of their 2021 results as the 31 March deadline approaches for the financial disclosures.

In what the parent company terms “a major incident”, Evergrande Property Services announced to the stock exchange without further explanation that “… in the review of the Company’s financial report for the year ended 31 December 2021, it was found that deposits of approximately RMB 13.4 billion as security for third party pledge guarantees had been enforced by the relevant banks.”

While the property management unit and Evergrande Group presented the $2.1 billion balance sheet bombshell as a surprise, analysts familiar with the company said the announcement could be an eleventh-hour revelation of bad news that the troubled giant had been trying to suppress until Hong Kong market rules, which require results to be filed by the end of this month, forced the disclosure.

“Evergrande announced, in the passive voice, that, in effect, banks had seized more than $2 billion of assets as collateral,” said Brock Silvers, chief investment officer at Kaiyuan Capital. “This implies a surprise, but Chinese banks typically don’t work that way. It seems more likely that the company is now revealing under duress what it had previously known.”

Expert Investigators Needed

With Evergrande holding an equity stake of about 58 percent in the property services firm, the parent group assured investors that it will take a closer look into how the assets shifted from the balance sheet of its property services unit to those of its lenders.

“Evergrande Property Services will establish an independent investigation committee and arrange for experts to be appointed to investigate the pledge guarantees,” Evergrande chairman Xu Jiayin said in a late Monday filing with the Hong Kong stock exchange.

Silvers noted that, by launching an investigation of the pledge guarantees, Evergrande could be setting the stage for disclosure of further asset seizures by creditors, or attempting to avoid accusations that it had failed to accurately report its finances.

“If domestic surprises continue to claim the company’s remaining assets to the detriment of offshore bond investors, Evergrande may precipitate the end of dollar bond market viability,” Silvers added.

With trading in shares of all three Hong Kong-listed Evergrande units having been frozen since early Monday, the investigation was revealed on the same day that the Shenzhen-based developer said it would miss the 31 March deadline for publishing its 2021 results, echoing similar announcements made earlier that day by rivals Sunac China Holdings and Shimao Group Holdings and mid-sized builder Ronshine China Holdings.

Getting Professional Help

In a separate filing on Monday, Evergrande blamed several factors for the expected delay in posting its results, including effects from the COVID-19 outbreak in China and a large number of additional procedures introduced by its auditor after the company saw “drastic changes in the operational environment” beginning in the second half of 2021.

Evergrande also announced that its risk management committee — a panel set up last December comprising officials from the Guangdong provincial government and mainland state-owned enterprises — was reaching out to Hong Kong law firm King & Wood Mallesons for advice on mitigating and eliminating risks relating to its debts and following up with demands from creditors.

The developer’s failure to lay bare its books for the first annual reporting period fully affected by China’s crackdown on developers is likely to heap more pressure on the company to speed up the process of sorting out its more than $300 billion in liabilities.

Evergrande vowed Monday to publish the annual results as soon as practicable after audit procedures have been completed, but it gave no timetable for their release.

Blame It on COVID

Sunac, China’s fifth-largest developer by contracted sales, provided a detailed explanation for its postponed annual report in a Monday statement, pointing to the pandemic’s impact on audit procedures such as confirmations from banks, customers and suppliers that could not be completed as scheduled. Processes that require on-site inspections, such as interviews with partners and financial institutions, were also delayed, the company said.

The Tianjin-based developer plans to publish unaudited annual results on 31 March, it said, adding that the report should contain “sufficient material information” to keep investors informed of its business and financial position.

In its own bulletin, Shimao said it would hold a board meeting on 31 March for the purpose of considering and approving the company’s unaudited annual results. Certain management and employees of the group had been placed under quarantine in the latest wave of COVID-19, which it blamed for the delay in releasing the annual report.

Ronshine rang the alarm bell on Monday when it became the first top-25 China developer to announce a hold-up in releasing its 2021 results. This time the snag was the resignation of the company’s auditor, PricewaterhouseCoopers, which was unable to finish its work within an agreed schedule, Ronshine said.

Later on Monday the developer announced the appointment of local accounting firm Elite Partners CPA to replace PwC.