It’s fun to watch. China’s Evergrande, the most indebted developer in the known universe, is hurtling into the abyss. Its deleveraging efforts have all been for nought:
On the face of it, China Evergrande Group made progress cutting its debt load in the first half of the year. On closer examination, paying its dues got even harder.
Evergrande’s total liabilities including bills owed to suppliers rose to 1.97 trillion yuan ($305 billion) as of June 30, near a record high, results showed Tuesday. While its borrowings shrank to 572 billion yuan, the group’s cash and cash equivalents plunged to a six-year low.
There are 1229 words left in this subscriber-only article.
Start your free 14-day trial today!
The upshot: Evergrande will need to accelerate asset sales and continue to aggressively discount apartment prices to generate enough cash to meet its obligations. The world’s most indebted developer is all too aware of what’s at stake, saying it risks defaulting on borrowings if its all-out effort falls short.
The firm is now halting construction projects:
Cash-strapped China Evergrande Group said work has been suspended on some of its real-estate projects after it delayed payments to its suppliers and contractors, showing how the developer’s financial troubles have spilled over into its business operations.
This is the pointy end of it. As projects stall, there will be several impacts:
- The threat of legal action rises from all creditors rises.
- Contagion into the wider developer market accelerates as both buyers and sellers lose faith in the segment.
- Counterparty risk skyrockets and spreads blow out.
- Other developers get into trouble, rinse and repeat.
A worsening selloff in China Evergrande Group’s dollar bonds is once again spreading to other developers, raising the stakes for Chinese authorities as they mull whether to support billionaire Hui Ka Yan’s embattled property empire.
The collateral damage was concentrated in junk-rated developers including Kaisa Group Holdings Ltd., Fantasia Holdings Group Co. and Guangzhou R&F Properties Co. The latter company’s dollar notes due 2024 tumbled 4.1 cents to 66.8, according to Bloomberg-compiled data. Declines in the broader Chinese high-yield space reached as much as 2 cents on the dollar, halting a tentative rally over the past few days.
There are no happy endings coming to this:
Beijing has good reasons to ensure that apartment buyers don’t get stiffed, but investors might be less lucky.
China’s most indebted property developer needs to sell more apartments to survive, but it also needs to find the cash to build them. In the end, some of that cash will likely come from the government—but that doesn’t mean the company will survive in its current form, or that bondholders will emerge unscathed.
That seems to be about the right formulation for the bail-in when it comes. When it does, it will take time and be messy if Beijing wants to imprint a message on bondholders permanently, which it appears to.
We are still a long way from resolving this and while we do the Chinese property monster is in for a shock, followed by a permanently lower growth trajectory.