The days and weeks to come will be critical. While Evergrande has a grace period of up to 30 days on an interest payment of nearly $ 84 million that was due Thursday, it is expected to make a payment on another bond next week.
Here’s what you need to know about Evergrande and how it got to where it is now.
What is Evergrande?
Apart from housing, the group has invested in electric vehicles, sports and amusement parks. She even owns a food and beverage business, selling bottled water, groceries, dairy and other products across China.
How did he encounter problems?
In recent years, Evergrande’s debts have exploded as she borrowed to finance her various activities.
The group has gained notoriety for becoming the most indebted developer in China, with more than $ 300 billion in liabilities. In recent weeks, he has warned investors of cash flow issues, saying he could default if he is unable to raise funds quickly.
In some ways, the company’s aggressive ambitions are what put it in the hot water, experts say. The group “has moved away from its core business, which is part of how it got into this mess,” said Mattie Bekink, Chinese director of the Economist Intelligence Unit.
Goldman Sachs analysts say the company’s structure has also made it “difficult to get a clearer picture of [its] recovery. “In a recent note, they underlined “the complexity of Evergrande Group, and the lack of sufficient information on the assets and liabilities of the company”.
But the group’s struggles are also emblematic of the underlying risks in China.
“The story of Evergrande is the story of the depths [and] structural challenges of the Chinese economy related to debt, âBekink said.
In a recent note, Mark Williams, Capital Economics’ chief economist for Asia, said the Evergrande collapse “would be the biggest test the Chinese financial system has faced in years.”
âThe root of Evergrande’s problems – and those of other highly leveraged developers – is that demand for residential properties in China is entering an era of sustained decline,â he wrote. “The ongoing collapse of Evergrande has drawn attention to the impact a wave of developer defaults would have on China’s growth.”
How does he try to move forward?
While the news may appease investors, many questions remain unanswered. Evergrande did not specify the terms of the payment in its statement, and interest worth $ 83.5 million on a dollar-denominated bond also matured on Thursday. This deadline came and went with no update from the company.
On September 14, Evergrande announced that it had brought in financial advisers to help assess the situation.
While these companies are tasked with exploring âall feasible solutionsâ as quickly as possible, Evergrande warned that nothing is guaranteed.
So far, the conglomerate has struggled to stem the bleeding and has failed to find buyers for parts of its electric vehicle and real estate services business.
At the time of this filing, he had made “no significant progress” in his search for investors, and “it is not certain that the group is able to make such a sale”, he said. .
The company also attempted to sell its office tower in Hong Kong, which it bought for around $ 1.6 billion in 2015. But this was “not completed on schedule,” he said. he declares.
How are investors reacting?
Evergrande’s problems have spilled over into the streets this month when protests erupted at its headquarters in Shenzhen. Reuters images showed dozens of protesters at the site last week, approach a person identified as a representative of the company.
But shareholders have been suspicious for months: the stock has lost nearly 85% of its value this year.
Earlier this month, Fitch and Moody’s Investors Services both downgraded Evergrande’s credit ratings, citing its liquidity problems. “We regard some fault as probable,” Fitch wrote in a recent note.
“In our opinion, how the Evergrande credit strains are resolved will influence market sentiment,” Goldman Sachs analysts wrote recently, referring to the credit market and the economy in general. They added that the Chinese bond market could be affected and that a loss of confidence could “spill over to the real estate sector at large”.
What could happen next?
The Chinese government seems to be starting to intervene.
Over the past few days, the People’s Bank of China has injected liquidity into the financial system, to help increase short-term liquidity and calm nerves.
The authorities are clearly watching closely, while trying to project calm.
Last week, Fu Linghui, spokesman for China’s National Bureau of Statistics, acknowledged the difficulties of “some large real estate companies,” according to state media.
Without directly naming Evergrande, Fu said that the Chinese real estate market has remained stable this year, but that the impact of recent events “on the development of the whole sector must be observed.”
According to the report, officials in Evergrande’s home province of Guangdong have already rejected a rescue request from its founder. Authorities in Guangdong and Evergrande did not respond to a request for comment.
Beijing has few good choices. He will want to protect the thousands of Chinese who bought unfinished apartments, as well as construction workers, suppliers and small investors.
The authorities will also likely aim to limit the risk of bankruptcy of other real estate companies. But at the same time, they’ve long been trying to curb excessive developer borrowing – and won’t want to dilute that message.
Even with cash injections, some suggest it may already be too late to save the business.
Evergrande’s financial woes have been widely described by Chinese media as a “huge black hole”, implying that no amount of money can solve the problem.
âChina has been really trying to clean up bad debts for years. And although they made progress before the pandemic, the task often seems endless, and that’s certainly what you see here,â Bekink said.
“The impacts of a major Evergrande default would be remarkable.”
–Kristie Lu Stout, Julia Horowitz, Laura He and the Beijing office of CNN contributed to this report.