25 August 2019
Xu Jiayin's Evergrande needs to meet a cash call from electric car startup Faraday Future. Photo: China Daily
Xu Jiayin's Evergrande needs to meet a cash call from electric car startup Faraday Future. Photo: China Daily

Why Evergrande pays over 13 percent coupon for offshore funds

Top developer Evergrande Group recently sold US$1.5 billion worth of bonds with a coupon rate of over 13 percent, pushing up the yield of other bond issues from the same sector.

Evergrande has reported a sales revenue of over 500 billion yuan (US$72.34 billion) in the first 10 months of the year. The company had nearly 260 billion yuan of cash on its balance sheet at the end of June. So why would it want to issue bonds at such a high interest rate?

It has to do with tightening regulations over capital outflow and Evergrande’s troubled investment in electric car startup Faraday Future.

It used to be quite common for Chinese conglomerates to borrow overseas using domestic assets like cash or properties as collateral. But since last year, this kind of arrangement has been regarded as an indirect form of moving assets overseas. With the authorities stepping efforts to fight capital flight, such financing method has been basically suspended.

Although Evergrande’s founder Xu Jiayin is one of the richest men in China and his flagship is holding a huge cash pile, its domestic funds simply cannot be used for overseas projects.

In the meantime, Evergrande has to meet a cash call from Faraday Future.

After having quickly depleted the US$800 million injected by Evergrande, the startup is seeking another US$700 million from the developer.

The two had a dispute over the funding requests, but according to an arbitration decision released by the Hong Kong International Arbitration Centre, Faraday has the right to seek additional funding.

Also, if Evergrande stops the cash infusion, it would risk having its equity interest in the company diluted.

Such funding needs and the tight regulation over overseas loans backed by domestic assets are probably the key factors behind Evergrande’s issuance of those high-yield papers.

This article appeared in the Hong Kong Economic Journal on Nov 5

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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