(Bloomberg) -- China Evergrande Group surprisingly decided against declaring a special dividend after investors were spooked by news that banks and ratings companies are growing wary of the debt-laden developer.
The board chose to cancel the proposal less than two weeks after flagging it to investors. It took into consideration the current market environment, the rights of shareholders and creditors, and the long-term development of businesses, according to a statement to the Hong Kong stock exchange on Tuesday.
Led by Chairman Hui Ka Yan, the world’s most indebted developer has been trying to convince bond and stock holders that it has ample ammunition to make good on its borrowings, while also countering short-sellers. Its credit rating was cut by S&P Global (NYSE:SPGI) Ratings late Monday, the third downgrade by a global firm in about a month.
The decision to forgo the shareholder reward confounded analysts who had reckoned Evergrande may take one of three routes: a cash payment, a stock dividend or handing out shares in its higher-value listed subsidiaries.
“It’s clearly negative for equity holders,” said Eddie Chia, a portfolio manager at China Life Franklin. “However, saying and not doing something might spook some bond investors, even though it’s relatively neutral given there is no asset or dividend leakage.”
Shares of Evergrande fell as much as 9.1% on Tuesday morning in Hong Kong. The stock has dropped 59% this year.
Its bond due 2025 was indicated down after falling 1.5 cents on the dollar to 51.7 cents the previous day, Bloomberg-compiled data show.
Evergrande said on July 15 that its board would discuss the special dividend, after the stock slumped 48% from a January high. The announcement briefly triggered a spike in the shares that was erased as investor doubts over the troubled developer turned into panic.
Markets were spooked last week by a loan dispute the developer had with Guangfa Bank, which led to the freezing of a $20 million deposit held by Evergrande’s main onshore subsidiary. The incident, which was later resolved, pointed to “the fragility of the company’s funding situation,” S&P said, lowering the credit rating by two notches. S&P also cited margin erosion as the developer resorts to aggressive price promotions to accelerate sales.
The investor rout deepened after a Chinese city last week halted its sales at two residential projects and alleged Evergrande didn’t properly use funds, before a quick resolution the next day.
On top of that, at least four of Hong Kong’s largest lenders stopped providing mortgages to buyers of Evergrande’s unfinished apartments in the city. At least two of them are reconsidering the halts after their decisions were questioned by the Hong Kong Monetary Authority, Bloomberg reported.
The last time Evergrande doled out a special dividend, in 2018, its earnings were soaring, though bearish bets abounded then too. It has since seen annual profit drops for 2019 and 2020, with total liabilities swelling to $301 billion.
(Updates with portfolio manager comment, stocks and bonds in fifth to seventh paragraphs)
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