China Evergrande Group's (3333.HK) huge liabilities and diminishing cash disclosed in its long-overdue reports for the past two years raises questions about the viability of its restructuring plan and operations, creditors and analysts said.
A comment from Evergrande's auditor that it did not express an opinion on the reports due to material uncertainties over the embattled property developer's ability to continue as a going concern has further stoked worries, they added.
"The financial statements provide little evidence the group can normalise operations after a debt restructure," said Charles Macgregor, head of Asia of Lucror Analytics.
Evergrande slipped into a liquidity crisis in mid-2021. With one of the largest debt piles in the country, its debt problem has rippled through China's property sector, a pillar of the world's second-largest economy, leading to a string of defaults and uncompleted homes across the nation.
The firm announced an offshore debt restructuring plan in March, expecting it to facilitate a gradual resumption of operations and generation of cash flow. It is now gathering creditor support to complete the process.
Evergrande on Monday reported a combined loss of $81 billion for 2021 and 2022. Its total liabilities amounted to 2.4 trillion yuan ($335 billion) last year, up 23% from 2020.
Its total current borrowings stood at 587.1 billion yuan at end-2022. Total cash slumped to 14.3 billion yuan, versus 28.8 billion yuan in 2021 and 180.7 billion yuan in 2020.
OFFSHORE DEBT
Creditors and analysts are now waiting for the convening hearings for Evergrande's offshore debt restructuring schemes in the hope to get more clarity on its business outlook.
The hearings will be held in a Hong Kong court on July 24, and a Cayman Islands court on July 25, for creditors to consider and approve the restructuring proposal.
A creditor expressed concerns that a continued halt in the trading of Evergrande's shares could lead to a delisting in what would be a setback for the restructuring process.
"That'd jeopardize the restructuring terms, which include many debt-to-equity swap," the creditor said on condition of anonymity given the sensitivity of the matter.
Evergrande has given creditors a basket of options to swap their debt into new bonds and equity-linked instruments backed by it and its two Hong Kong-listed companies - Evergrande Property Services Group (6666.HK) and Evergrande New Energy Vehicle Group (0708.HK).
Shares of all three companies have been halted from trading since March 2022. A company risks being delisted in Hong Kong if its shares remain suspended for 18 months.
The creditor questioned whether a "disclaimer of opinion" from the auditor, Prism Hong Kong and Shanghai Limited, which also cited insufficient appropriate audit evidence was partly why the group's shares remained suspended.
Among four types of auditor opinions, a "disclaimer of opinion" ranks as the second lowest. It is common on financial reports of defaulted private developers.
Evergrande declined to comment. Hong Kong Stock Exchange said it does not comment on individual companies as a policy.
In order to resume trading, Evergrande has to satisfy all requirements laid out by the exchange, including publishing the 2021 and 2022 results, addressing any audit modifications, and taking remedial measures after an investigation into 13.4 billion yuan of seized deposits of a unit.
But some creditors are more optimistic than others.
"No one has any expectations from Evergrande's results. Being able to publish the reports was already one step forward for them," a bondholder said. "This is the worst time for them, it can only get better."
($1 = 7.1732 Chinese yuan)
