Evergrande Group, China’s second-largest property developer by sales, runs a risk of defaulting on its debts if the firm is unable to raise funds quickly. The situation is worsened for the firm because out of its $300 billion in liabilities, interest payment to bond holders come due on Thursday. Many analysts are saying the payments due on Thursday will be a key test in which can be characterized as a “Lehman Brothers moment,” of whether the developer will continue meeting obligations to bondholders even as it falls behind on payments to banks, suppliers and holders of onshore investment products.
The Evergrande Group
Evergrande Group is one of China’s largest real estate developers. According to the 2021 Fortune Global 500 List, it is the 122nd largest group in the world by revenue. The company is listed on the Hong Kong exchange and its base of operation is in the southern Chinese city of Shenzhen. The company is responsible for employing about 200,000 people and it also indirectly helps sustain more than 3.8 million jobs each year.
The company was founded by Chinese billionaire Xu Jiayin, who was once the country’s richest man. Evergrande made majority of its wealth in residential property. According to the company, it touts of owning “more than 1,300 projects in more than 280 cities” across China however, its operations extend far beyond that.
Outside the real estate industry, the group has invested in electric vehicles, sports and theme parks. It also owns a food and beverage business, selling bottled water, groceries, dairy products and other goods across China.
What caused the current crisis?
In recent years, the company has been taking loans and that in turn caused its debts to increase as the company is finding it difficult to meet up with repayments. Because of this, the company was named China’s most indebted developer, with more than $300 billion worth of liabilities. In the last few weeks, it has warned investors of cash flow issues, saying that it could default if it is unable to raise money quickly.
That warning was emphasized last week, when Evergrande disclosed in a stock exchange filing that it was having trouble finding buyers for some of its assets. According to experts, the company’s aggressive ambitions are what landed it in hot water. Mattie Bekink, China director of the Economist Intelligence Unit stated, “strayed far from its core business, which is part of how it got into this mess.”
As mentioned earlier, the company’s real estate business is not its only business as the company is engaged in a lot of businesses that are capital intensive which includes the manufacturing of electric cars, owning and managing a football team called Guangzhou Evergrande and also owning a themed park called the Evergrande Fairyland.
Bekink also believes that the company’s current issues are also a reflection of the underlying risks of doing business in China. He stated, “The story of Evergrande is the story of the deep [and] structural challenges to China’s economy related to debt.”
Last year, a great deal of Chinese state-owned companies defaulted on their loans, raising fears about China’s reliance on debt-fueled investments to support growth.
Mark Williams, Capital Economics’ chief Asia economist stated that “Evergrande’s collapse would be the biggest test that China’s financial system has faced in years.” He further stated, “The root of Evergrande’s troubles and those of other highly-leveraged developers is that residential property demand in China is entering an era of sustained decline. Evergrande’s ongoing collapse has focused attention on the impact a wave of property developer defaults would have on China’s growth.”
What is happening now?
The company has been making attempts to salvage the situation. Last week, Evergrande announced that it had brought on financial advisers to help assess the situation. While those firms are tasked with exploring “all feasible solutions” as quickly as possible, Evergrande has cautioned that nothing is guaranteed.
The prospects of a solution would be a miracle as the conglomerate has struggled to stem the bleeding and has failed to find buyers for parts of its electric vehicle, its property services businesses and its office tower in Hong Kong.
As mentioned earlier, Evergrande is due to pay $83.5 million in interest relating to its March 2022 bond on Thursday. It has another $47.5 million payment due on the 29th of the Month for March 2024 notes. According to Bloomberg, Evergrande has $669 million in coupon payments coming due through the end of this year.
How are the markets reacting?
The company’s stock listed on the Hong Kong exchange has lost more than 80% of its value this year, from 14.14HKD to currently stand at 2.28HKD, a price point that has not been trading in 11 years. Today alone, the stock price lost over 10%.
Stock markets are reacting negatively to the Evergrande news especially in China where there is a crackdown in the tech sector by regulators. The Hang Seng Index (HSI) on Monday dropped 3.3%, suffering its worst decline in nearly two months, as Chinese banks, insurers and other real estate companies declined.
In the U.S the DOW Jones industrial index, the S&P 500 index and the NASDAQ index are down 1.43%, 1.67% and 2.19% respectively. In the U.K the FTSE 100 is down 0.95%.
The cryptocurrency market looks to be hit the most by the news as the market capitalization is down 8.71% as the market cap broke below the $2 trillion support level to currently stand at $1.94 trillion. Flagship cryptocurrency Bitcoin is down by 8.28%, to currently trade $43,600 as of the time of this writing.
Louis Tse, managing director at Wealthy Securities, a Hong Kong-based brokerage stated that “Evergrande is just the tip of the iceberg.” He added, “That affects the banks as well… if you have lower property prices what happens to their mortgages? It has a chain effect.”