Evergrande Creditors Left With Few Options As Beijing Sets The Agenda

China Evergrande Group's creditor are facing dimmer chances of ever getting their money back as the country's real estate crisis spreads and claims on the developer's assets continue to pile up

The company was supposed to have a restructuring plan in place by the end of July. In a late Friday evening filing to the Hong Kong Stock Exchange, Evergrande said it hopes to restructure its offshore borrowings before the end of the year, and that its stake in its electric vehicle and property management units can be offered as supplement credit enhancement.

The Shenzhen-based property developer and its founder will most likely have limited say in how this happens as the government-supervised restructuring process has a new priority. Construction on pre-sold homes in more than 90 Chinese cities has been suspended due to the cash crunch. As a result of the fear that their homes may never be completed, many people have stopped making mortgage payments.

There is a risk that problems in the real estate sector will spill into the financial system at a time when the president is expected to seek a third term. Beijing will oversee Evergrande's restructuring to make sure it complies with the government's priority of maintaining financial and social stability.

The current must-do for the Chinese government is to make sure Evergrande delivers its already sold projects. Payment for the rest can wait if the company puts its limited resources on this.

According to the director of Beijing-based Chanson & Co., the company is expected to contribute to funds that will be set aside for the construction of unfinished homes. According to a report last week, Beijing is considering setting up a fund to help distressed sectors. In order to resume construction, the city of Zhengzhou has set up a separate rescue fund.

International debtors have a high likelihood of launching more legal proceedings against the firm to protect their interests, according to Chanson.

Recovery prospects are getting worse for them. The recovery value of offshore bonds has been hurt by the misuse of cash under the property service arm in China.

An investigation in July found that the unit in question, the Hong Kong-listed Evergrande Property Services, had used nearly $2 billion of its bank deposits as collateral to secure loans for unnamed third parties, and the borrowed amount was diverted back to the parent company. The banks seized the collateral after the third-party borrowers failed to pay up.

Several executives at the parent company had to step down, but that was not enough to appease international investors. The funds could not have been pledged without disclosure to the investors, so the creditor demanded an explanation as to how the funds could have been pledged.

International investors could face a haircut of as much as 85% according to Chen, up from the 75% estimate she first gave. The net of debt doesn't stop here. On Sunday, Evergrande said in another filing that a subsidiary based in the southeastern city of Nanchang had been ordered to pay a guarantor almost $1 billion as compensation, and it will need to sell shares in the Shengjing Bank to cover that amount. There is a chance that more claims are on the way, according to Shu Hui Woon.

She said in an email that it's unclear what assets the company still has as Evergrande might have provided guarantees that are still undisclosed or unclaimed. The restructuring progress might be further delayed if the company tries to negotiate with the debt holders.