Evergrande: Communist China’s “Lehman” Warns of Possible Default
Billionaire investor George Soros recently wrote an article in the Financial Times warning of China’s looming financial crisis, with a particular focus on the debt of Evergrande, the regime’s largest real estate company. Dubbed China’s Lehman, the company is drowning in over 300 billion USD in debt and, according to Mr Soros, could default and crash.
However, Soros is not the only one to recognise Evergrande’s red flags. Many have long been wary of the Shenzhen-based company’s risk of crashing; alternative news outlet Zerohedge has chronicled Evergrande’s plight over the past year.
Furthermore, in an earnings statement on Tuesday, the company itself warned of a default risk if it cannot raise enough cash to pay back its debt.
“The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business,” the statement reads.
“Shareholders and potential investors are advised to exercise caution when dealing in the securities of the group.”
Naturally, this announcement has unsettled the developer’s bond investors.
The real estate giant will likely not resolve its debt dilemma without a bankruptcy or state bailout. However, despite its recent bailout of China Huarong Asset Management Co., Ltd, Beijing has not shown any signs of assisting Evergrande in repaying its liabilities. The developer’s bonds continue to sink amidst plummeting investor confidence in its chances of repaying and recovering from its debts.
“Increased defaults coupled with above-average spread volatility in the Asia credit market throughout this year had led us to believe that the notion of ‘too big to fail’ was diminishing. Instead, the Huarong rescue package illustrates to us that the notion does in fact still hold but be likely limited to higher quality SOE names, where spillover risks are much more profound,” wrote Union Bank of Switzerland analyst Kamil Amin last week.
Mr Amin says he is not yet convinced that Beijing will offer the same state support for Evergrande.
“Firstly, the issuer is a POE, not an SOE, and secondly, we expect the Chinese authorities to continue reigning in on excess leverage in the property sector and let defaults/restructurings drift higher. This view is consistent with the price action we have seen (Figure 2), with other higher quality SOE names across the financial sector having tightened post the Huarong news (China IG: -5bp), while China HY and Evergrande spreads have continued to trade >1150/5000bp,” he stated.
Zerohedge previously reported on the company’s endeavours to sell interests in its assets, including listed electric vehicle and property services units, while seeking new investors and renewing its borrowings.
Evergrande is also selling properties at a loss to raise cash. For example, it plans to sell its Hong Kong office tower headquarters to Yuexiu Property Co. for 10.5 billion HKD (1.3 billion USD), a third of the 15.6 billion HKD asking price.
“Evergrande’s gross margin could compress further on the potential fire sale of its properties,” stated Bloomberg Intelligence analyst Lisa Zhou.
Moreover, long-term Evergrande ally Chan Hoi-wan, the Chief Executive Officer of Chinese Estates Holdings Ltd. and wife of Hong Kong billionaire Joseph Lau, sold her Evergrande shares for the first time, bringing her holdings down from 9.01 per cent to 8.96 per cent.
Evergrande also stated some of its property development payables were overdue, causing a suspension of work on some projects. However, the real estate conglomerate is negotiating with suppliers and construction contractors to fix this issue.
“The group will do its utmost to continue its operations and endeavour to deliver properties to customers as scheduled,” the company stated.
According to Bloomberg, Evergrande’s borrowing has reached its lowest in five years (572 billion yuan). However, its total liabilities, including bills owing to suppliers, shot up to a near-record high of 1.97 trillion yuan.
“Judging by the continued selling of both Evergrande bonds and stocks, consensus agrees. Yet when faced with the task of cleaning up after what would be a huge shock to the system – and at $300 billion, Evergrande is orders of magnitude bigger than Lehman ever was – will China blink, or will Soros be right?” stated Tyler Durden, Zerohedge reporter.
Upload Layout: Candy