China Evergrande on Wednesday chided three former executives for their roles in a scheme in which loans secured by pledge guarantees were transferred and diverted back to the debt-saddled developer via 36 unnamed third parties and used for general operations.
In a filing with the Hong Kong stock exchange, Evergrande said the behaviour of certain directors “fell below the standards expected by the company of its directors” in carrying out the pledge scheme, the details of which were first revealed last July following a preliminary inquiry.
Evergrande at the time stated that CEO Xia Haijun and CFO Pan Darong, both executive directors of the company, and Ke Peng, an executive president of property flagship Hengda Real Estate Group, were participants in the scheme. The three execs were dismissed and the developer launched an “independent investigation” into the scheme.
“After investigation, the independent committee does not recommend reinstating Mr Xia, Mr Pan or Mr Ke to their original positions,” Evergrande chairman Xu Jiayin said in Wednesday’s filing.
Special Project Unravels
In December 2020, the developer proposed a “special financing project” to meet its capital needs: subsidiaries would provide pledges as security for external third parties to apply for bank financing, and the funds obtained by such third parties would then be injected into the parent group to repay its liabilities, according to the HKEX filing.
Between December 2020 and August 2021, six subsidiaries of Evergrande’s property services unit provided the pledges to eight mainland banks for the purposes of obtaining financing for 36 third-party companies as guaranteed parties. The relevant funds were transferred to Evergrande through certain guaranteed parties and various intermediary companies.
From September 2021 to December 2021, the deposit certificate pledge guarantees came due to the tune of RMB 13.4 billion (now $2 billion). The July 2022 inquiry followed an announcement last March that RMB 13.4 billion in assets had disappeared from the balance sheet of Evergrande Property Services.
Evergrande said it’s now in discussion with the property services unit on a proposal to repay the funds involved in the pledges, potentially by transferring Evergrande assets to the unit to offset the relevant sums. The developer also plans to beef up oversight at the group, including with the appointment of an internal control advisor.
Accounting in Disarray
The revelation of the $2 billion loan scheme factored in PricewaterhouseCoopers’ decision to step down last month as auditor of Evergrande’s financial statements. The Big Four accounting firm also cited the failure of the developer to provide information related to its still-unreleased 2021 annual results.
In the wake of PwC’s exit, Bloomberg reported in January that Evergrande was contemplating two potential options for restructuring its $16.6 billion offshore debt load.
One option would involve instalment payments on principal with the time for total repayment reaching as much as 12 years, the news agency said Tuesday, citing sources who asked not to be identified. An issuance of new notes with coupon rates as low as 2 percent would replace the old securities.
Under the second option, creditors would swap part of the debt pile into shares of Evergrande, Evergrande Vehicle and Evergrande Property Services via the issue of new hybrid securities like convertible bonds. These would feature less lengthy instalment plans and coupons of 6 to 7 percent, according to Bloomberg’s sources.