Ahead of a potential merger or a takeover of Evergrande Group, BlackRock may see the short end of the stick if China decides to look to combine the Chinese consumer and property developers.
Evergrande is gearing up for a public share offering, which it may use to raise up to $1.5 billion to aid its bid for medical center developer China Everdream. A deal between the two companies could close as early as the end of August. The completion of the offering is contingent on Evergrande completing a divestment from Evergold, a further fundraising plan for which it recently hired Goldman Sachs.
However, BlackRock is Evergrande’s largest shareholder and, according to Bloomberg, was the only one who wouldn’t offer a so-called “record-date” when Evergrande went public last year. In March, the world’s largest asset manager told shareholders in a letter: “We do not currently consider Evergrande part of our investment franchise and we have not communicated that view in any correspondence to the Company’s shareholders.”
BlackRock declined to comment for this story.
Given BlackRock’s reluctance to invest in the company, Evergrande could be required to boost its credit rating, which would likely put further pressure on its credit markets. Not only will the state-owned operator of Evergrande also be looking to clinch a deal for another major stakeholder, CEFC, to provide China Evergold with its €5 billion capital raise, but it could also look to further reduce its debt to fund the Evergold deal.
“As potential acquirers of a significant stake in Evergrande, CEFC and a potential BlackRock-led shareholder would be particularly interested in evergold’s credit rating and the likelihood of debt reduction,” analysts for CLSA write in a note released last month. “We believe this will make it difficult for both to proceed with the Evergold buyout.”
Looking beyond what BlackRock and CEFC may be planning, if state-owned China Evergold does raise capital from private investors to fund China Evergold’s buyout, it would face even more added pressure to bring its credit rating down to under BBB- from above.
Here’s why: Thanks to Evergrande’s high-risk profile, underwriter Renaissance Capital recently downgraded its credit rating on the stock from Ba3 to Ba2. Due to this, Renaissance now estimates that $35 billion of the stock’s total market capitalization was exposed to bond default risk. For comparison, Evergrande’s 2018 bonds carry an investment grade rating of Baa3 and a noteholder credit risk level of “2” (the highest threat level possible) from Moody’s, but only an “A3” rating and a bondholder credit risk of “1” from Standard & Poor’s.
If Evergold were able to merge with Evergrande, analysts at China Raterim say it would likely have even lower ratings.
For these reasons, the authors of the CLSA note argue that “it is impossible for Evergold’s bondholder to demonstrate enough confidence to provide the required financing,” regardless of CEFC or BlackRock. “Having the prospect of additional debt without strong enough covenants appears a risk for Evergold itself.”