Thread by @bauhiniacapital

Just a note on this "Guangdong Govt Work Group" which is apparently being dispatched to Evergrande... at Evergrande's request... 👀

Evergrande is, simply put, two companies.

The offshore parent with the USD bonds (or most of them) made a filing at 8pm HKT.

There is a technicality on a repayment of an already overdue but extended bond guarantee (for US$260mm) and $82+mm of coupons due 6 Nov, with 30d grace period now DEFINITELY due Monday.

https://twitter.com/bauhiniacapital/status/1466758259940167680?s=20

That OFFSHORE parent has some $20bn or so of debt it has to pay. The assets which underlie that debt are holdings in listed subs, some unlisted cos, some debt extended to affiliates, cash borrowed from affiliates, and 60% of the ONSHORE parent which runs the property developer.

All the operational real estate business - the 800 projects in 240 cities with 1 million + homebuyers waiting for delivery?

That is run by the blue box blue box in the 2017 "simplified corporate structure" org chart in the tweet below.

https://twitter.com/bauhiniacapital/status/1428675027176628230?s=20

...in that tweet, just above the orange box, there is a dotted line running across the chart. Everything above is OFFSHORE. Everything below is ONSHORE.

There are more boxes not shown in the "complicated corporate structure" (i.e. project subs) below the blue.

I expect some 80+% of the group's consolidated liabilities of ~$300bn and the vast majority of any off-balance sheet and contingent liabilities are blue box and below.

When people talk about the idea that "offshore bondholders will be treated worse than onshore bondholders", it may end up being factually correct, but it is that the creditors of the defaulting parent (who expected they had equity in the subs) could end up with a lower payout

than the creditors of a bankrupt subsidiary.

Parent Co owns $10bn of stuff plus 60% of a sub worth $50bn in terms of net assets (say $260bn debt, $320bn assets). Parent Co has $20bn of debt.

Theoretically, Parent has $40bn of assets against $20bn of debt. OK. Looks good.

But if the $60bn equity sub runs into problems and all the assets have to be liquidated to people at a discount, perhaps the assets are only worth 70cts on the dollar, so $224bn. Debt was $260bn.

Creditors - if treated equally - get 86cts on the dollar.

Equity holders of Subsidiary - including the 60% ownership stake held by the Parent - get nothing.

So now Offshore Parent has $10bn of assets against $20bn of bonds.

So they get... less than 86cts on the dollar.

But it isn't "unfair." It just is. It's the same reason why

founders often end up with nothing when their startup goes to zero, but the VC fund which bought in later gets the scrap value.

NB: numbers are in the right range *give or take* but are shown for illustrative purposes' as I write this from memory Friday night in front of NFLX.

Onshore, there are issues of structural seniority.

Hengda Subsidiary has subs of its own.

Those subs own assets and have debt. The creditors of those subs get first dibs. The rest trickles up. Then that "rest" pays the unsecured liabilities left over at Main Sub level.

Then there are the homebuyers. They may get treated better than banks as 'project creditors'. Suppliers too?

Then there are WMP holders who are weirdly in a very. very strange legal situation. And those will be dealt with as politically expedient/necessary. Many think they will

get their money bank but I think they too will get a haircut (i.e. will not be paid back in full).

So yeah... holders of Evergrande's offshore bonds may end up getting less than holders of Evergrande's onshore bonds, but there is literally nothing nefarious about it from a

normal corporate finance point of view. It may end up getting dodgy elsewhere, but at the dollar bond level, that should be pretty clear (unless there is fraudulent conveyance of assets before default, which is also possible).

Anyway... back to the work group.

Well-known hugely indebted HNA Group got its formal default notice from the Hainan People's Court in January 2021. Restructuring was voted on recently.

But a Hainan local govt "work group" took over in late Feb 2020.

bloomberg.com/news/articles/…

The news this evening that the Guangdong local govt will send in a "work group" 'at the company's request' is interesting.

ca.finance.yahoo.com/news/evergrand…

The question is... which Evergrande will get the work group?

Evergrande Offshore?

Evergrande Onshore?

Both?

If Evergrande Offshore (3333 HK), how exactly would that work? 🤔

And if Hui Ka Yan was 'summoned' after the 8pm Friday night drop, was it because the monies due immediately by Evergrande Offshore are almost identical to the cash Chairman Hui raised by selling stock in $3333.HK a week ago and GD govt wants him to use that to get an extra month?

Postscript: Apols for those already in the weeds. This was a basic summary in case Offshore Evergrande triggers Event of Default on Monday (which would not, necessarily, precipitate a BK filing, but could), which would not necessarily trigger a Hengda EoD.