Oaktree Capital has seized one of Evergrande’s most-prized assets in mainland China, a rare intrusion by a global investor in a domestic crisis caused by the biggest ever collapse of a property developer.
The move by the US distressed debt specialist — which now controls the sprawling “Venice” residential development on the Yellow Sea coast near Shanghai — is a first for an international investor affected by Evergrande’s spiralling $300bn crisis.
The finances of the world’s most indebted developer started to unravel last year, prompting a wave of defaults across China’s real estate industry, which has for decades underpinned its economy.
The Venice project defaulted on a secured loan provided by Oaktree late last year, according to two people with knowledge of the details. The loan was around $400m, one of the people said.
The default allowed Oaktree — a $158bn asset manager run by Howard Marks in Los Angeles — to take control of the project’s equity, restart construction and begin selling its apartments, the person said.
Official business records in China confirm that Oaktree’s Hong Kong-based managing director Raymond Chan became the legal representative of Qidong Hengmei Real Estate Co, the company that runs the Venice project in October.
Oaktree declined to comment and Evergrande did not immediately respond to a request for comment.
Oaktree’s highly unusual control over the huge mainland development shines a light on the otherwise opaque problems of Evergrande, which is expected to require the largest restructuring in China’s history. The legal strength of foreign claims on Chinese assets has long been unclear, but there are no signs of any challenge from Beijing or other authorities to Oaktree’s move.
Venice is one of hundreds of developments launched by Evergrande, which borrowed heavily on international markets and in China to fund its expansion before eventually succumbing last year to a combination of construction delays, litigation and the pressures of its vast debts.
The group officially defaulted on its bonds in December after months of missing payments.
The Financial Times revealed this week that Oaktree had made secured loans to two major Evergrande projects, including the Venice development and a large plot of land in Hong Kong called “Castle”, where Evergrande had intended to build a Versailles-like mansion. Oaktree seized the Hong Kong asset this week.
Oaktree’s control of both projects means Evergrande cannot sell them to raise cash as part of its restructuring; this will be an important test of Beijing’s response to foreign involvement in a largely domestic crisis.
Faced with a painful slowdown across the property sector and a wave of developer defaults on bond markets, Chinese authorities have prioritised finishing construction and transferring properties to customers, who often buy in advance.
Evergrande has invested Rmb30bn ($4.7bn) in Venice since it started the project around a decade ago. Construction included cordoning off several kilometres of the ocean to dye it a brighter shade of blue. The project is currently marketing 294 apartments and has 66m sq ft of residential space.
Oaktree referred to both loans last year in a letter to investors seen by the FT, which stated each was around 60 to 70 per cent of the asset’s total value.
Offshore bond investors with around $20bn in exposure have been largely left in the dark since Evergrande began missing interest payments in September. The developer said this week that it is aiming to come up with a preliminary restructuring proposal within six months.