Evergrande: A black swan event that could spook markets

EverGrande is now known as the “world’s most indebted property developer” and serves as a symbol of corporate excess.



The Evergrande Real Estate Group, China’s second-largest property developer by sales, faces a debt crisis of nearly two trillion yuan ($305 billion), which might have greater repercussions over the broader Chinese property sector, says a report by Goldman Sachs.

The real estate company is trying to raise funds as it finds avenues for a bailout by the government, or at worst, a managed collapse.

“We believe that further disruptions to the company’s property development operations can be very negative for sentiment amongst domestic property buyers and investors, and potentially spill over to the broader property sector,” Goldman Sachs’ Kenneth Ho and Chakki Ting wrote in the note.

Goldman Sachs

Goldman Sachs World Headquarters

Analysts say if the property operations could be somehow maintained, then the expected fallout on the other real estate businesses could be saved.

JP Morgan is of a similar opinion. ”With recent events accelerating to the downside, we believe additional manoeuvres are needed by the government to prevent potential spillover,” the bank said in a separate note.

“If politicians toe the government directives on ensuring a stable housing market, we do not expect the company’s imminent default to be too disruptive for the sector,” JPMorgan said.

Goldman Sachs analysts laid out the possible options the company could explore, including third-party investments, a corporate restructuring, or a debt and equity overhaul.

The company’s U.S. dollar-denominated bonds are priced around 20s cents, hence, the contagion impact may be limited if restructuring prospects were close to current market levels, the analysts wrote.

EverGrande is now known as the “world’s most indebted property developer” and serves as a symbol of corporate excess.

China has seen many large corporates and state-run entities default on debt payment in the aftermath of the pandemic. Traditionally, the state is known to bale out debt-ridden companies, however, China’s debt markets have seen waves of defaults since the latter part of 2020 as business incomes faltered. Halfway through 2021, 25 Chinese businesses had defaulted on about $10 billion worth of bonds, setting a new record.

Evergrande leveraged outrageous amounts of credit during China’s real estate craze to fuel growth. With the onset of the pandemic and a long-term slowdown in China’s property market, things have quickly spiraled down on the developer. With a payment crunch, the company is defaulting on payments. Chinese regulators ordered the firm to sell off its assets, which include an electric vehicles firm and other side ventures, in order to survive. Regulators have also signed off on a reset of Evergrande’s debt terms, allowing it to push back deadlines for payments to banks.

But these measures might not be enough, as according to the company’s 2020 annual report, the firm has more than $52 billion worth of debt set to be due within a year. The sale of its assets (the EV business) is also stuck as potential buyers are waiting for default so that they can buy these assets at a steep discount.

This has led to a downgrade of Evergrande bonds by Moody’s and Fitch.

The question is—Will the government step in to save the day for Evergrande?

The sheer scale of Evergrande’s debt burden makes such a save doubtful. The Chinese government has also done a policy shift in its bailout regime. Beijing wants to trim over-indebtedness in the real estate industry. It has instituted a lending limit for real estate developers called the “three red lines”.  The three lines refer to debt-to-equity, debt-to-cash, and debt-to-assets, of which the policy limits their annual growth at no higher than 15 percent. China may just let this debt bomb explode.

Another point of view is that three-fourth of China’s household wealth is tied up in real estate. Even the upstream suppliers are waiting to be paid, hence, ignoring the reality of the situation is just not feasible for the time being.

Anna Domanska
Anna Domanska is an Industry Leaders Magazine author possessing wide-range of knowledge for Business News. She is an avid reader and writer of Business and CEO Magazines and a rigorous follower of Business Leaders.

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