China Evergrande Centre building sign is seen in Hong Kong
Clare Jim
Tue, September 14, 2021
HONG KONG (Reuters) - China Evergrande Group has raised fresh warnings of default risks amid late payments to wealth management and trust products.
The real estate giant has been scrambling to raise funds it needs to pay lenders and suppliers, with regulators and financial markets worried that any crisis could ripple through China's banking system and potentially trigger wider social unrest.
WHO IS EVERGRANDE?
Founded in 1996 by Chairman Hui Ka Yan in the southern city of Guangzhou, Evergrande accelerated its growth in the past decade to become China's second-largest property developer with $110 billion in sales last year.
The company listed in Hong Kong in 2009, giving it more access to the capital and debt markets to grow its asset size to $355 billion today. It has more than 1,300 developments across the nation, many in lower-tier cities.
With national sales growth slowing in recent years, Evergrande has also been branching into businesses unrelated to real estate, such as electric cars, football, insurance and bottled water.
HOW DID CONCERNS ARISE OVER DEBT PILE?
Investors became worried after a leaked letter in September showed Evergrande had pleaded for government support to approve a now-dropped backdoor listing plan, warning it faced a cash crunch.
Concerns intensified after Evergrande admitted in June it did not pay some commercial paper on time, and news in July a Chinese court froze a $20 million bank deposit held by the firm on the request of Guangfa Bank.
Evergrande's fast expansion over the years has been fuelled by debt. It has been aggressively raising loans to support its land buying spree, and selling apartments quickly despite low margins so as to start the cycle again.
The firm's interim report said its interest-bearing debt totalled 571.8 billion yuan ($89 billion) at the end of June, compared with 716.5 billion at the end of 2020, as it stepped up deleveraging efforts.
Total liability, which include payables, however, increased slightly to 1.97 trillion yuan, accounting for around 2% of the country's GDP.
Other than the usual bank and bond channels, the developer has been criticised for tapping the less regulated shadow banking market, including trusts, wealth management products and commercial paper.
WHAT EVERGRANDE HAS DONE TO DELEVERAGE?
Evergrande accelerated its efforts to reduce its debts last year after regulators introduced caps on three debt ratios dubbed "the three red lines" policy. It has said it aims to meet all the requirements by the end of next year.
Evergrande has given buyers steep discounts for its residential developments and sold the bulk of its commercial properties to increase cashflow. Since the second half of 2020, it has had a $555 million secondary share sale, raising $1.8 billion by listing its property management unit in Hong Kong, while its EV unit sold a $3.4 billion stake to new investors.
It unveiled plans earlier this year to spin off three unlisted units -- online real estate and automobile marketplace Fangchebao, and theme parks and spring water businesses -- to further release capital. Fangchebao has already raised $2.1 billion in a pre-IPO in March.
On Tuesday, it said its asset and equity disposal plans to ease liquidity issues have failed to make material progress.
DOES EVERGRANDE POSE A RISK?
China's central bank highlighted in its financial stability report in 2018 that companies including Evergrande might pose systemic risks to the nation's financial system.
Evergrande's liabilities involve more than 128 banks and over 121 non-banking institutions, according to the letter Evergrande sent to the government late last year. JPMorgan estimated last week China Minsheng Bank has the highest exposure to Evergrande.
Late payments could trigger cross-defaults as many financial institutions have exposure to Evergrande via direct loans and indirect holdings through different financial instruments.
In the dollar bond market, Evergrande accounts for 4% of Chinese real estate high-yields, according to DBS. Any defaults will also trigger sell-offs in the high-yield credit market.
A collapse of Evergrande will have a large impact on the job market. It has 200,000 staff and hires 3.8 million people every year for project developments.
WHAT HAVE REGULATORS SAID?
The People's Bank of China and the China Banking and Insurance Regulatory Commission summoned Evergrande's executives in August and warned that it needed to reduce its debt risks and prioritise stability.
Evergrande must "actively diffuse debt risk and maintain real estate and financial markets stability," they said in a joint statement, and "earnestly implement strategic arrangements made by the central government to ensure the stable and healthy development of the real estate market, and strive to keep operations stable".
Media reports said regulators have approved an Evergrande proposal to renegotiate payment deadlines with banks and other creditors. The Guangzhou government is also seeking opinions from Evergrande's major lenders about setting up a creditor committee.
($1 = 6.4427 Chinese yuan)
(Editing by Sumeet Chatterjee and Jacqueline Wong)
Evergrande: Why the Chinese property giant is close to collapse
China Evergrande, once the country's second-largest real estate developer, is drowning in debt. Some 1.5 million people have put deposits on new homes that have yet to be built. A collapse could be catastrophic.
Shares of China Evergrande Group have slumped to their lowest in seven years
Property giant China Evergrande Group admitted Tuesday it is under "tremendous pressure" and may not be able to meet its crippling debt obligations.
Over the past two days, angry protesters have gathered outside the real estate firm's headquarters, demanding to know about its future.
Investors are growing increasingly nervous that if Evergrande were to collapse, this could could spread to other property developers and create systemic risks for the banking system of the world's second-largest economy.
What is China Evergrande?
Previously known as Hengda, China Evergrande was until recently the country's second-largest property group by sales.
Located in the southern city of Shenzhen close to Hong Kong, Evergrande sells apartments to upper- and middle-income property buyers. It has a presence in more than 280 cities.
The firm was started in 1997 by Hui Ka Yan (Xu Jiayin in Mandarin), who has since become a billionaire through the opening up of China's economy.
Last year, Forbes listed Hui as the third-richest man in China — but his wealth has since plummeted.
Evergrande has vastly grown due to a spectacular real estate boom caused by China's unprecedented growth.
The firm has completed nearly 900 commercial, residential, and infrastructure projects, and says it employs 200,000 people.
Evergrande has expanded into other areas of the economy, including food and leisure. It also operates the Guangzhou FC football club, formerly Guangzhou Evergrande.
However, its electric car unit, founded in 2019, is not currently marketing any vehicles.
Why is Evergrande in trouble?
The Hong Kong-based developer is sinking under a mountain of liabilities totaling more than $300 billion (€254 billion) after years of borrowing to fund rapid growth.
Evergrande has stepped up acquisitions in recent years, taking advantage of a real estate frenzy.
But the property giant began to falter after Beijing introduced new measures in August 2020 to closely monitor and control the total debt level of major property developers.
Evergrande relied on presales to finance itself and keep its activities afloat, and the crackdown forced the group to offload properties at increasingly steep discounts.
Investors have made down payments on around 1.5 million properties, Bloomberg reported, citing data from December.
Many buyers have expressed concern on social media about whether they will get their money back after housing projects were suspended.
Evergrande was downgraded by two credit rating agencies last week and its Hong Kong-listed shares have collapsed by more than 80% this year.
On Monday, the Shanghai Stock Exchange paused trading in Evergrande's May 2023 bond after it fell more than 30%.
Dozens of anxious investors protested outside the headquarters of troubled Chinese property giant Evergrande on Tuesday
What is the company doing to save itself?
On Tuesday, Evergrande issued another statement to the Hong Kong Stock Exchange, saying it had hired financial advisers to explore "all feasible solutions" to ease its cash crunch.
The statement warned that there was no guarantee the property firm would meet its financial obligations.
The firm blamed "ongoing negative media reports" for damaging sales in the pivotal September period, "resulting in the continuous deterioration of cash collection by the group which would in turn place tremendous pressure on [...] cashflow and liquidity."
Even property discounts of up to a quarter off and selling stakes in some of its wide-ranging assets hasn't stopped a 29% slide in profit for the first half of the year.
Hui Ka Yan (or Xu Jiayin in Mandarin), is chairman of China Evergrande Group
Why are Evergrande's woes so important?
Real estate is one of the major engines of China's growth, responsible for 29% of economic output, and any bankruptcy of such a major company would have huge repercussions.
"Evergrande's collapse would be the biggest test that China's financial system has faced in years," said Mark Williams, chief Asia economist at Capital Economics.
Yet "markets don't seem concerned about the potential for financial contagion at the moment," he said, adding "that would change in the event of large-scale default."
Some analysts believe there is a slim chance Beijing would allow such a behemoth to go under.
Beijing "will not let Evergrande go bankrupt" as it would undermine the regime's stability, analysts at US-based SinoInsider said.
Bloomberg reported Tuesday that China's Guandong province had hired a team of accountants and legal experts to advise it on Evergrande's restructuring needs, although the regional government had turned down a request for a bailout.
China Evergrande, once the country's second-largest real estate developer, is drowning in debt. Some 1.5 million people have put deposits on new homes that have yet to be built. A collapse could be catastrophic.
Shares of China Evergrande Group have slumped to their lowest in seven years
Property giant China Evergrande Group admitted Tuesday it is under "tremendous pressure" and may not be able to meet its crippling debt obligations.
Over the past two days, angry protesters have gathered outside the real estate firm's headquarters, demanding to know about its future.
Investors are growing increasingly nervous that if Evergrande were to collapse, this could could spread to other property developers and create systemic risks for the banking system of the world's second-largest economy.
What is China Evergrande?
Previously known as Hengda, China Evergrande was until recently the country's second-largest property group by sales.
Located in the southern city of Shenzhen close to Hong Kong, Evergrande sells apartments to upper- and middle-income property buyers. It has a presence in more than 280 cities.
The firm was started in 1997 by Hui Ka Yan (Xu Jiayin in Mandarin), who has since become a billionaire through the opening up of China's economy.
Last year, Forbes listed Hui as the third-richest man in China — but his wealth has since plummeted.
Evergrande has vastly grown due to a spectacular real estate boom caused by China's unprecedented growth.
The firm has completed nearly 900 commercial, residential, and infrastructure projects, and says it employs 200,000 people.
Evergrande has expanded into other areas of the economy, including food and leisure. It also operates the Guangzhou FC football club, formerly Guangzhou Evergrande.
However, its electric car unit, founded in 2019, is not currently marketing any vehicles.
Why is Evergrande in trouble?
The Hong Kong-based developer is sinking under a mountain of liabilities totaling more than $300 billion (€254 billion) after years of borrowing to fund rapid growth.
Evergrande has stepped up acquisitions in recent years, taking advantage of a real estate frenzy.
But the property giant began to falter after Beijing introduced new measures in August 2020 to closely monitor and control the total debt level of major property developers.
Evergrande relied on presales to finance itself and keep its activities afloat, and the crackdown forced the group to offload properties at increasingly steep discounts.
Investors have made down payments on around 1.5 million properties, Bloomberg reported, citing data from December.
Many buyers have expressed concern on social media about whether they will get their money back after housing projects were suspended.
Evergrande was downgraded by two credit rating agencies last week and its Hong Kong-listed shares have collapsed by more than 80% this year.
On Monday, the Shanghai Stock Exchange paused trading in Evergrande's May 2023 bond after it fell more than 30%.
Dozens of anxious investors protested outside the headquarters of troubled Chinese property giant Evergrande on Tuesday
What is the company doing to save itself?
On Tuesday, Evergrande issued another statement to the Hong Kong Stock Exchange, saying it had hired financial advisers to explore "all feasible solutions" to ease its cash crunch.
The statement warned that there was no guarantee the property firm would meet its financial obligations.
The firm blamed "ongoing negative media reports" for damaging sales in the pivotal September period, "resulting in the continuous deterioration of cash collection by the group which would in turn place tremendous pressure on [...] cashflow and liquidity."
Even property discounts of up to a quarter off and selling stakes in some of its wide-ranging assets hasn't stopped a 29% slide in profit for the first half of the year.
Hui Ka Yan (or Xu Jiayin in Mandarin), is chairman of China Evergrande Group
Why are Evergrande's woes so important?
Real estate is one of the major engines of China's growth, responsible for 29% of economic output, and any bankruptcy of such a major company would have huge repercussions.
"Evergrande's collapse would be the biggest test that China's financial system has faced in years," said Mark Williams, chief Asia economist at Capital Economics.
Yet "markets don't seem concerned about the potential for financial contagion at the moment," he said, adding "that would change in the event of large-scale default."
Some analysts believe there is a slim chance Beijing would allow such a behemoth to go under.
Beijing "will not let Evergrande go bankrupt" as it would undermine the regime's stability, analysts at US-based SinoInsider said.
Bloomberg reported Tuesday that China's Guandong province had hired a team of accountants and legal experts to advise it on Evergrande's restructuring needs, although the regional government had turned down a request for a bailout.
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