Sun. May 29th, 2022

Oaktree Capital has scuppered a plan to restructure Evergrande’s $ 20bn of offshore debts by seizing a vast Hong Kong plot where the ailing property developer’s chair had intended to build a Versailles-like mansion.

Los Angeles-based Oaktree this week moved to seize control of the asset – known by insiders as “Project Castle” – after Evergrande defaulted on a loan against which the $ 158bn asset manager had security, according to two people familiar with the matter.

The 2.2m sq ft project was a key piece of collateral in a planned restructuring of Evergrande’s giant offshore debt load but the plan is now in turmoil after Oaktree appointed a receiver, according to one of the people.

Project Castle was set to form a significant chunk of the assets that would facilitate the restructuring of the company’s offshore debts, one of the people said.

“Evergrande has got the offshore bondholders to stop making noise on the basis there’s a restructuring process coming soon,” said this person. “That land was going to be used to facilitate the restructuring.”

The appointment of the receiver has to be approved by a Hong Kong court, after which the asset “will be removed from the general restructuring of Evergrande”, according to the second person involved.

Evergrande announced on the Hong Kong stock exchange on Wednesday that it “aims to come up with a preliminary restructuring proposal in the next six months”.

Architectural drawing of the Hong Kong plot where Evergrande's chair intended to build a Versailles-type mansion

Architectural drawing of the Hong Kong plot where Evergrande’s chair intended to build a Versailles-type mansion © Handout

Oaktree has previously reassured its clients about the ease with which it could seize the “Project Castle” development, according to a copy of a 2021 investor letter seen by the FT. This said that the firm “structured these transactions with legal protections” that would enable it “to get to the underlying collateral in a smooth fashion should a legal process ensue”.

The move by Oaktree represents one of the most significant yet from any international player in the ongoing crisis at Evergrande, which last year became a symbol of the vast debts underpinning China’s property sector and now faces a drawn-out restructuring process. Oaktree declined to comment. Evergrande did not immediately respond to a request for comment.

Evergrande’s debt restructuring will be the biggest in China’s history and a politically sensitive process for a company whose rapid growth made its chair and founder Hui Ka Yan China’s richest man as recently as 2017 and where tens of thousands of ordinary Chinese citizens hold investments in the company and have bought its homes.

Evergrande has scrambled to reassure creditors after a series of defaults since its finances started to unravel last year.

Investors on international bond markets, where Evergrande has borrowed around $ 20bn of its more than $ 300bn in total liabilities, have focused on its offshore assets including listed subsidiaries in Hong Kong. They last week warned about potential enforcement action against the company, which responded with a statement asking them not to take legal action.

Evergrande’s $ 4.7bn bond maturing in 2025 is trading at around 16 cents on the dollar, meaning bondholders are expecting to get back a tiny fraction of the money they lent the company.

Evergrande had been attempting to sell the residential project, in the Yuen Long area of ​​Hong Kong’s New Territories, since last year as part of its plans to sell non-core assets to minimize losses for creditors. It was reported to be valued at around US $ 1bn.

Oaktree’s founder Howard Marks, a former acolyte of the so-called “junk bond king” Michael Milken, has a reputation as one of the savviest specialists in distressed investing, where hedge funds try to extract profits from the debts of troubled companies.

In September, Marks told the Financial Times that Oaktree’s long-term time horizon allowed it to ride out the short-term market volatility in China. He said: “Compared with the US, Europe and Japan, I think of China as an economic adolescent. . . tempestuous and volatile but its best decades are ahead. ”

Evergrande first began missing interest payments on its offshore bonds in September and was placed in default by Fitch, the rating agency, in December. By that time its liquidity woes had spread across China’s vast real estate sector and several of its peers had also missed international bond payments.

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