Oaktree Capital is risking a showdown with Beijing over control of one of ailing property developer’s Evergrande’s most-prized projects in mainland China.
The Los Angeles-based asset manager has a secured loan to a sprawling tourism resort on the Yellow Sea coast called “Venice” that would allow it to take control of the land in the event of a default, according to a letter to investors and a person close to the matter.
A move by Oaktree to seize the Venice development could have a profound affect on the wider restructuring of Evergrande, the property developer that has scrambled to reassure its creditors since its finances started to unravel last year.
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”.
If Oaktree moves to seize control over the land it could face a difficult fight in the mainland Chinese courts over an asset that is strategically important to Evergrande and Beijing, because of its vast size and because ordinary Chinese citizens have bought homes there.
The Venice project, which has been in development for more than a decade, embodied the meteoric ambitions of Evergrande, which has racked up more than $300bn of debt to fund its rapid expansion.
The resort has a “platinum seven-star hotel, nine centres (for international conferences, catering, health, sports, badminton, tennis, business, children and entertainment), a bar street and a food street”, according to the local government website for the area. It also has a residential area that covers 66m sq ft, which includes homes and schools.
Oaktree on Tuesday took control of a vast plot of land in Hong Kong called “Project Castle” after Evergrande defaulted on a loan. The move threw into turmoil a plan to restructure the Chinese developer $20bn of offshore debts as it was a crucial piece of collateral in a planned deal for bondholders.
Lending in mainland China is considered far riskier than in Hong Kong because of the difficulty foreign creditors have in navigating the labyrinthine local court system and claiming security on assets.
While many US distressed debt funds refuse to lend against assets on the mainland for this reason, others have been coaxed into this riskier form of Chinese lending because of the dearth of opportunities in more mainstream debt markets.
In letters to its investors last year, Oaktree said the Venice loan was made at “about mid-60s see-through LTVs” — meaning that the size of the debt is just over 60 per cent of the asset’s overall value — and that it benefited from “substantial” protections that included claims on the “underlying properties”. The letter did not disclose the size of the loan.
According to a local government website for the province where the development is located, about two hours drive from Shanghai, Rmb30bn ($4.7bn) has been invested in the project.
“In addition to structuring our investments with priority claims on the underlying assets, we structured our Venice financing with a guarantee from Evergrande’s listed company,” the 2021 investor letter continued, in an apparent reference to the Hong Kong-listed entity China Evergrande Group.
Oaktree founder Howard Marks, a former acolyte of “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.
Oaktree last year closed its $16bn “Opportunities Fund” — one of the largest ever funds focused on lending to troubled companies — and has made an aggressive push into investments related to China. The US fund last year lent €275m to a holding company that also owns Italian football club Inter Milan, which is majority owned by Chinese retail giant Suning, helping cover liquidity needs.
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. Tens of thousands of ordinary Chinese citizens hold investments in the company and have bought its homes.
Additional reporting by Eleanor Olcott, Harriet Agnew and Thomas Hale