China Evergrande’s Debt Woes Rise!

China’s second largest property developer is on the brink of collapse as it faces a deepening liquidity crisis. China Evergrande, which is currently overseeing almost 800 projects across 200 cities in China, has so far this year (2021) experienced a 75 per cent drop in its share price.

For over two decades, the developer expanded on the back of China’s sweeping urbanisation and aggressive leverage. The company has moved to divest assets in recent months after the firm struggled to service its debts after a crackdown on the property sector by China’s central government in Beijing. The developer is reported to have amassed $120 billion in debt and close to $300 billion in total liabilities.

Beijing’s “three red lines” policy is a trio of metrics that policymakers have enforced to encourage the property industry to de-leverage. Failure to meet these metrics means an inability to access new loans. In August, Beijing summoned Evergrande’s executives to discuss the fact it was short on two metrics and issued a warning that the company would need to reduce its debt risks and prioritise stability. After the meeting, the developer “promised” to follow Beijing’s orders and said it would disclose information in a “timely manner”, would not “spread rumours” in the market and would clarify “false information” as requested by the authorities.

Evergrande claims to employ 200,000 people and indirectly generates 3.8 million jobs in China. On the face of it, China Evergrande Group made progress cutting its debt load in the first half of the year. On closer examination, paying its dues got even harder. 

The developer’s borrowings, or interest-bearing debt, fell to a five-year low as of June 30. But its overall liabilities rose to a near-record 1.97 trillion yuan ($305 billion), thanks mainly to swelling bills to suppliers. Cash and cash equivalents plunged to a six-year low. The upshot: Evergrande will need to accelerate asset sales and continue to aggressively discount apartment prices to generate enough cash to meet its obligations. Bonds tumbled after the world’s most indebted developer said it risks defaulting on borrowings if its all-out effort falls short.

Evergrande said it’s exploring the sale of interests in its listed electric vehicle and property services units, as well as other assets, and seeking to bring in new investors and renew borrowings. Sharp discounts to swiftly offload apartments cut into margins in the first half, helping push net income down 29% to 10.5 billion yuan, in line with an earlier profit warning. “The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business,” the Shenzhen-based company said in the statement. “Shareholders and potential investors are advised to exercise caution when dealing in the securities of the group.” 

With banks, suppliers and homebuyers exposed to the real estate giant, any collapse could impact China’s economy. Regulators urged Evergrande to resolve its debt woes in a rare public rebuke. Among Evergrande’s top lenders are China Minsheng Banking Corp., Agricultural Bank of China Ltd. and Industrial & Commercial Bank of China Ltd.

An Evergrande plan to renegotiate payment deadlines with banks and other creditors has been approved by China's Financial Stability and Development Committee according to Bloomberg. Banks have yet to agree to the proposal, however, according to two people familiar with the situation.

Analysts expect a creditors committee to be formed to help the company tide over the crisis. Creditors’ committees work a little differently in China than elsewhere. Rather than being set up when a company requires restructuring, in China they typically form before default and function as a forum for creditors to help keep companies alive. They can collectively agree to roll over loans or extend new credit. It is also the channel through which the authorities can exert pressure on all major debtholders.

Close to 300 companies in China have defaulted with possible severe economic repercussions. Hopefully, the Chinese authorities can “engineer” a soft landing for the property sector to stave off a major recession.

References:

1. China Evergrande’s debt woes mount, www.theurbandeveloper.com

2. Evergrande’s total liabilities swell to over $300 billion, Bloomberg News, September 1, 2021

3. China Evergrande faces default test as bond coupons come due, Narayanan Somasundaram, Nikkei Asia, September 14, 2021