Concerns over the China Evergrande Group’s massive debt are piling up. The company has raised default concerns after missing bonds payments this week. Many fear that the near-term default of the developer could trigger widespread losses and pose systemic risks to the financial system in China. Even after the Chinese property developer continues to restructure its debt, its defaults troubles have now caught investors’ attention, with many fearing that the company is already running insolvent.
Evergrande’s severe mountain of debt not only shone a spotlight on China’s vast property sector, that accounts for 40% of Chinese household wealth. But, it has also spooked the global stock markets, with speculators worrying about another global financial crisis, similar to Lehman Brothers.
The second-largest real estate company in the country by floor area sold was once China’s top-selling developer, which booked $78.4 bn in revenue last year. Now, Evergrande holds the title of the world’s most indebted property developer, whose liabilities extend to more than 128 banks and over 121 non-banking institutions. According to UBS, Evergrande Group’s total liability size is $313bn, which is 6.5% of the total liability of the Chinese property sector. Meanwhile, around $20 bn of Evergrande’s debts are owed offshore.
Uncertainty about its future has triggered shockwaves around the world, especially since last week when Evergrande appointed financial advisers for exploring feasible options to ease its liquidity woes. It also warned about missing loan repayments and said it faced “unprecedented difficulties” in a statement on September 13. Earlier in March, the developer pledged and outlined a plan to cut its $100 bn debt pile roughly in half to $54.2 bn or less by mid-2023.
In the meanwhile, Evergrande’s Hong Kong shares have dropped from 14.1 HKD ($1.81) to 2.3 HKD ($0.3), after falling another 11.6% on Friday. Evergrande’s valuation has now reduced from $24 bn to $5 bn in Hong Kong. Furthermore, major banks and fund managers like HSBC, UBS have announced a reduction of their exposure to Evergrande in recent weeks.
Evergrande seeks to offer some relief
Offering some relief to investors over its ballooning debt, Evergrande announced that it “resolved” one payment of $35.6 m in interest on a domestic bond with bondholders, without giving details. Evergrande has shed nearly $8 bn worth of assets so far this year.
This week, the company’s chairman Hui Ka Yuan, has promised to fulfil responsibilities to property buyers, investors, partners and financial institutions.
But these steps by the developer haven’t taken it off the shaky ground yet. The company missed an $83.5m payment of interest to holders of an offshore dollar bond, which is due on its March 2022 bond on Thursday. This was after the Evergrande already missed interest payments to at least two of its largest bank creditors on Monday. Moreover, the indebted property giant did not make any announcement on whether it will be able to pay another $47.5m interest payment, which is due on September 29 for March 2024 notes.
It also has to pay another $37 bn in interest and maturing debt over the next one year period. Failure to pay off the debt within 30 days of the scheduled payment dates would put both bonds in default.
China adds cash to calm nerves
Amid intensifying debt crisis at China Evergrande, the People’s Bank of China boost sentiment by pumping liquidity into the financial system, to help calm the country’s financial markets.
In the past five working days, China’s central bank has injected $71 bn worth of short-term cash into the banking system, including another $10 bn on Friday. This recent injection of gross short-term cash by China’s central bank is the highest since February.
Besides this, Chinese authorities have also tried to intervene and ask banks to allow for payment extensions for Evergrande.
Given the company’s precarious financial position that could create damaging consequences for the nation’s financial system, many industry experts suggest a possible bailout of Evergrande by Chinese regulators. Although, no such indication has been made yet.
Oxford Economics lead economist Tommy Wu and head of Asia economics Louis Kuijs said, “While we think the government doesn’t want to be seen as engineering a bailout, we expect it to step in to conduct a managed restructuring of the firm’s debt to prevent disorderly debt recovery efforts, reduce systemic risk, and contain economic disruption,” they wrote in a note.
The economists added,” If a restructuring plan along these lines works, we expect the implications for the overall economic and policy outlook to remain contained. However, financial conditions for the broader property sector will remain tense for some time, with some spill-over into wider financial sector stress.”
Rating agencies such as Fitch Ratings and S&P Global have also downgraded the company’s bonds. As per S&P Ratings, while the real estate developer has repaid all its public bonds this year, but refinancing in 2022 would be challenging if the developer’s access to capital markets doesn’t recover in time.