Commentary on Political Economy

Friday, 25 September 2020



Evergrande Faces Crisis of Confidence Over $120 Billion Debt

Bloomberg News
Updated on 
  • Chinese developer’s bonds tumble on cash crunch worries
  • Evergrande cites online rumors, ‘fabricated’ documents
China Evergrande’s Warning Spooks Investors
China Evergrande’s Warning Spooks Investors

China Evergrande Group is facing a crisis of confidence among creditors who’ve lent the world’s most indebted developer more than $120 billion.

Long-simmering doubts about the property giant’s financial health exploded to the fore on Thursday, following reports it had sent a letter to Chinese officials warning of a potential cash crunch that could pose systemic risks. The news sparked a bondholder exodus that continued into Friday, sending the price of Evergrande’s yuan note due 2023 down as much as 28% to a record low. Losses in the company’s dollar bonds spread to high-yield debt across Asia.

Evergrande's dollar bonds sink amid fears of a looming credit crunch

Evergrande said in a statement that rumors and documents circulating online were “fabricated” and “pure defamation,” without commenting directly on whether it had warned officials of a potential cash crunch. The developer, controlled by billionaire Hui Ka Yan, said it generated 400 billion yuan from project sales in the first eight months and maintains healthy operations. Evergrande won approval from Hong Kong’s stock exchange to spin off its property management unit, it said on Friday, paving the way for it to raise much-needed capital.

That did little to buoy investor sentiment, however, with Evergrande shares falling 9.5% to the lowest level since May at the close of trading in Hong Kong.

The market’s biggest near-term worry relates to an agreement Evergrande struck with some of its largest investors. It gives them the right to demand their money back if the company fails to win approval for a backdoor listing on the Shenzhen stock exchange by Jan. 31. The repayment could amount to 130 billion yuan ($19 billion), or about 92% of Evergrande’s cash and cash equivalents. At least one of the investors has signaled it would be unwilling to extend the deadline.

In another sign of mounting concern among creditors, at least five Chinese banks and two trust firms held emergency meetings on Thursday night to discuss their Evergrande exposure and access to collateral, people familiar with the matter said. Among them was China Minsheng Banking Corp., whose exposure to Evergrande exceeds 29 billion yuan, one of the people said. Minsheng Bank declined to comment.

At least two of the banks that convened meetings on Evergrande decided to bar the company from drawing unused credit lines, according to people familiar. The developer had credit lines of 503 billion yuan as of June 30, of which 302 billion yuan were unused.

“Regardless of the authenticity of the letter, we think the situation may have prolonged negative impact,” Manjesh Verma and Stella Li, credit analysts at Citigroup Inc., wrote in a report. “It increases concerns among various investors and lenders and hence increases difficulty in funding access and refinancing.”

Read more on Evergrande:

Evergrande has long been viewed as a poster child for highly leveraged companies in China, where corporate debt swelled to a record 205% of gross domestic product in 2019 and has likely climbed further this year as firms increased borrowing to tide themselves over during the pandemic. Evergrande has tapped banks, shadow lenders and the bond market in recent years to expand beyond the property industry into businesses ranging from electric cars to hospitals and theme parks –- areas that often align with Chinese President Xi Jinping’s policy priorities.

Though it’s unclear why Evergrande has yet to win approval for its listing plan, some analysts have speculated it may relate to China’s efforts to tame sky-high home prices and restrain fundraising by developers. Regulators have been using a wide range of policy levers since 2016 to deter speculative home-buyers, curb expensive land prices and restrict lending to residential builders.

Evergrande has said it won’t raise new funds through the listing in Shenzhen, but the transaction could allow the company to achieve a higher valuation and thus easier access to future financing. Its stake sale to strategic investors in 2017 implied a valuation of about 425 billion yuan for the unit, which holds most of Evergrande’s real estate assets. That’s almost three times higher than the market value suggested by the developer’s existing shares in Hong Kong. Chinese property developers trade at about 12 times projected earnings on average in Shanghai and Shenzhen, compared with about 5 times in Hong Kong.

Coming Due

Evergrande's upcoming bond maturities are attracting investor attention

Source: Bloomberg

Note: Totals for HKD and yuan bonds converted into U.S. dollars. Totals represent bond principals.

One big unanswered question surrounding Evergrande is whether authorities would step in to support the developer if it struggles to repay creditors. While the Chinese government has a long history of bailing out systemically important companies to maintain financial stability, policy makers have in recent years sought to instil more market discipline and reduce moral hazard.

As part of efforts to rein in financial risk, authorities have taken control of indebted conglomerates including HNA Group Co., Anbang Insurance Group Co. and Tomorrow Group. They’ve also introduced new rules for financial holding companies, including Evergrande, that impose minimum capital requirements and other restrictions meant to reduce the threat of systemic blowups.

S&P Global Inc. cut its outlook on Evergrande’s B+ credit rating to negative from stable on Thursday, but downplayed the threat of a liquidity crunch. The ratings company noted that Evergrande is trying to convince strategic investors to stay put and is an “asset-rich” company with multiple fundraising channels.

Evergrande has vowed to increase sales as part of its effort to meet an aggressive deleveraging target -- cutting borrowings by about 150 billion yuan each year from 2020 to 2022, or about half its current debt load.

But the company has so far fallen short of the pledge. Evergrande’s total debt rose 4% in the first half to 835 billion yuan, while short-term debt was almost triple cash, equivalents and short-term investments combined, data compiled by Bloomberg show.

Here are some of the biggest Evergrande-related market moves on Friday:

  • Some of Evergrande’s domestic bonds hit record lows with sharp declines temporarily triggering trading halts; Its yuan bond due 2022 fell 18% to 77.7 yuan; bond due 2024 dropped 30% to 65.9 yuan

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