Finance:Evergrande liquidity crisis

From HandWiki
Residential buildings developed by Evergrande in Yuanyang County, Henan.

The Evergrande liquidity crisis refers to the ongoing financial situation of Chinese property developer Evergrande Group. After a letter circulated online of the company informing the Guangdong government that it was at risk of a cash crunch, shares in the company have plunged in value, with impacts on global markets and a significant slow-down in foreign investment in China during August to October of 2021.

Thousands of retail investors, as well as banks, suppliers, and foreign investors are owed money by the company. (As of September 2021), the developer has 2 trillion RMB (310 billion USD) in liabilities.[1]

Background

American Ambassador to China Terry Branstad visiting a Bo'ao hospital jointly established by Evergrande and Brigham and Women's Hospital, 2018.

Evergrande's diversification

Housing development in Shenzhen

Evergrande's land reserves alone are large enough to house 10 million people.[2] However, Evergrande had pursued an aggressive expansion over the last years, including ventures in electric vehicles, theme parks, energy, and many other sectors. These leveraged investments included Ocean Flower Island, a 100 billion RMB (15.5 billion USD) project to build an artificial island on the north shore of Hainan near Yangpu in the South China Sea,[3] plans to spend over 45 billion RMB (7 billion USD) between 2019 and 2021 in electric vehicle development,[4] and ownership of Guangzhou F.C., China's richest football club.[5]

Wealth management products

On 21 September 2021, Financial Times reported that "Evergrande used retail financial investments to plug funding gaps".[1] In this scheme, the company raised billions of dollars through wealth management products (WMP), using that money to make up for lacks of funding in the company and re-pay other wealth product investors. The products were highly risky, with an anonymous executive suggesting they were "too risky for retail investors and should not have been offered to them".[1] However, they were marketed widely, with Evergrande managers pressuring subordinates to purchase products advertised at over 10% annual returns. In total, the remaining WMP liabilities stand at 40 billion RMB.[1]

Referred to as a type of supply chain finance, investors would invest money in shell companies they falsely believed to exist to supplement their working capital. As sales in the products fell, the business model of the products became unsustainable. An Evergrande executive is quoted as saying "Many people . . . might be arrested for financial fraud if investors don’t get paid off. Our products were not for everyone. But our grassroots salespeople didn’t consider this when making their sales pitches and they targeted everyone in order to meet their own sales targets."[1] Other Chinese companies have also sold wealth management products, including Baoneng, Country Garden, Sunac, and Kaisa.[1]

"Three red lines" and Chinese regulations

Ocean Flower Island on the north shore of Hainan near Yangpu in the South China Sea

In an effort to rein in the highly indebted sector, the Chinese government enacted a "three red lines" rule to regulate the leverage taken on by property developers, limiting their borrowing based on their performance in debt-to-cash, debt-to-equity, and debt-to-assets metrics.[6] Evergrande is considered by analysts to be too big to fail and a Lehman Brothers–style collapse would have massive consequences on the Chinese economy and the world at large.[7]

The new regulations greatly affected the property developer, which had historically leveraged itself heavily. So while the company's stock price had outpaced the Hang Seng Index thirty-percent growth rate between its 2009 IPO and 2017, having multiplied eightfold, it had also become the world's most indebted property group.[2] The Financial Times cited the director of S&P Global Ratings as stating that the developer was "so highly leveraged, it's likely to breach all of the alleged thresholds".[2] The company announced in March 2021 that it was looking to cut its debt load by 150 billion RMB (USD$23.3 billion ‘).[2] Nonetheless, Evergrande was still expanding, having launched 63 new projects in the first half of 2021.[2]

Other central and local government regulations, including mortgage lending limits, rent caps in big cities, and land auction cancellations, precipitated a slowdown in the property sector, as authorities attempt to control rising house prices.[8]

By October 8 2021, 14 of China's 30 biggest developers had violated the regulations at least once. Guangzhou R&F had 3; Evergrande and Greenland Holdings had 2; and Aoyuan, CIFI Holdings, Country Garden, Greentown, Jiangsu Zhongnan, Risesun, Seazen Holdings, Shinsun Holdings, Sunac, Sunshine City Group, and Zhenro Group all had 1.[9] In total, these developers had sales in 2020 totalling over 4.34 trillion RMB (672 billion USD).[9]

Crisis

Letter

A letter circulated online on the last week of August 2021, where Evergrande informed the government of Guangdong province that they were close to running out of cash. The company alleges the letter has been fabricated and is "pure defamation", and followed its circulation by a number of public announcements to reduce fears from investors and the public.[2]

Credit rating

On 22 June 2021, Fitch downgraded Evergrande from B+ to B, and further downgraded it to CCC+ on 28 July.[10] According to the company, the initial downgrade reflected "ongoing pressure for Evergrande to downsize its business and reduce total debt,"[11] with the latter action being due to "Evergrande's diminishing margin of safety in preserving liquidity".[12]

On 3 August 2021, Moody's downgraded Evergrande's rating from B2 to Caa1.[13] On 5 August, S&P Global Ratings downgraded Evergrande and its subsidiaries from B− to CCC, two steps on its scale, qualifying it as having extremely speculative credit worthiness.[14] On 7 September, Fitch downgraded Evergrande further from CCC+ to CC.[15]

Debt payments

In a statement on 31 August 2021, Evergrande warned it would default on its debts if it failed to raise enough cash to cover them.[16] At the time, Evergrande was China's most indebted real estate developer, and has several large bond payments to make for the foreseeable future.[17] On 24 September, Evergrande missed off-shore bond payments totalling 83.5 million USD. While the company has 30 days to avoid defaulting on the debt, analysts feel it is unlikely to manage doing so.[18] On 12 October, Evergrande missed payments on three offshore bonds which totalled 148 million USD. By this date, the developer had missed 5 bond payments during the crisis.[19] On 20 October, Evergrande paid off US$83.5 million worth of interest in order to avoid a default on the 24 September bonds.[20]

Evergrande attempts to sell off assets

In order to raise capital, the group has started to sell off some of its assets. On 29 September 2021, the company sold a 20% stake in Shengjing Bank, retaining 15%, raising 10 billion RMB (1.5 billion USD).[21] On October 4, 2021, the Cailian Press reported that rival Hopson Development was set to buy a 51% stake in the Evergrande Property Services subsidiary for around US$5 billion.[22] On the same day, Evergrande froze its shares on the Hong Kong Stock Exchange citing a "possible general offer" in the near future, but until 20 October had not unfrozen them nor made announcements about the offer.[23] On 20 October, they announced that the deal had fallen through and applied to reopen trading on its shares.[24] Except for a stake in a regional bank, as of that date “there has been no material progress on sale of assets of the group” according to the Evergrande.[24] In response, shares fell 13.6%.[25]

Contagion

Western markets

American and European companies had significant exposure to Evergrande through their holding of corporate bonds. Ashmore Group, an emerging market specialist, owned more than $400 million at the end of June while UBS itself owned over $300 million. BlackRock had a total exposure of $400 million across all its funds, with one of its high-yield funds having acquired additional $18 million worth of bonds in August.[26] Other companies have had smaller exposure, with HSBC having a peak exposure of $31 million.[26]

China

On 28 September 2021, Sunac bought back $34 million of its bonds and denied requesting government assistance. A letter, which the developer claimed was merely a draft, surfaced online arguing that recent regulations in Shaoxing intended to control property prices had left a local project unable to break even.[27]

On 5 October 2021, developer Fantasia Holdings missed a payment on a USD$206 million bond that had matured the day before, triggering a default. Just weeks prior, the developer had assured investors it had "no liquidity issue".[28]

On 11 October 2021, developer Sinic Holdings Group Co. warned that it was unlikely to be able to pay off a USD$250 million dollar bond due on 18 October 2021. At the time of the announcement, Sinic had USD$694 million of dollar bonds outstanding.[29]

On the week of 11 October, Modern Land attempted to extend the maturity of a 250 million USD bond on Monday and the prices of Sunac and Guangzhou R&F bonds fell sharply.[30]

On 19 October, Sinic defaulted on US$246 million worth of bonds.[31] The same day, official figures showed real estate output in China was down 1.6% in the third quarter year on year, the first time it has been negative since the start of the pandemic.[31]

On 20 October, the National Bureau of Statistics of China published data indicating that home prices had fallen month-on-month for the first time since April 2015, dropping in more than half of the cities surveyed.[32]

Response

Chinese government

On 22 September 2021, the governments in Zhuhai and Nanshan District, Shenzhen took control of sales revenue for Evergrande's properties in a state-controlled custodial account to protect home-buyers and continue construction of the company's developments. Various provinces have been doing so since August as the developer has put hundreds of these projects on hold.[33]

On 15 October, the Chinese government commented for the first time on the Evergrande situation, blaming the company for its problems and saying that contagion to the financial system was controllable.[31]

Bondholders

Off-shore bondholders hired Kirkland & Ellis and Moelis & Company to advise them ahead of a potential restructuring, according to the Financial Times.[21] In the second week of October, they informed the bondholders that they expected an Evergrande default to be "imminent" and that the company had failed to engage with them "meaningfully".[34]

Other companies

PwC declined to comment on its auditing of Evergrande during the ongoing crisis, as it is a live engagement. Nonetheless, they have received criticism for signing off on the developer's financial statements.[35]

On 7 October, Chinese Estates Holdings announced they would go private in order to avoid contagion from a possible Evergrande default.[36]

See also

References

  1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 Yu, Sun; McMorrow, Ryan; Ju, Sherry Fei (21 September 2021). "Evergrande used retail financial investments to plug funding gaps". Financial Times. https://www.ft.com/content/0b03d4de-1662-4d30-bcfd-c9bae24fa9cc. 
  2. ↑ 2.0 2.1 2.2 2.3 2.4 2.5 Hale, Thomas; Lockett, Hudson; Xueqiao, Wang (30 September 2020). "Evergrande: the property group that has the market on edge". Financial Times. https://www.ft.com/content/839f6efe-5902-4e0f-845c-a862ee58782b. 
  3. ↑ Hale, Thomas; White, Edward (6 August 2021). "Evergrande seeks to offload assets as investor pressure grows". Financial Times. https://www.ft.com/content/a50e50e7-405e-4d66-bb62-8af02ac54aed. 
  4. ↑ "The road gets bumpy for billionaires investing in China's electric cars" (in en-US). 2019-12-03. https://www.japantimes.co.jp/news/2019/12/03/business/corporate-business/billionaire-china-invest-electric-cars/. 
  5. ↑ "Guangzhou Evergrande – China's richest football club in need of bailout" (in en). 2021-09-17. https://www.scmp.com/sport/football/article/3149150/guangzhou-evergrande-chinas-richest-football-club-need-bailout. 
  6. ↑ Hale, Thomas; Yu, Sun (10 November 2020). "China economy: will hot property market threaten post-pandemic rebound?". Financial Times. https://www.ft.com/content/c1144ffe-30f9-41d3-b033-bb82eca258b4. 
  7. ↑ Sender, Henny (13 October 2020). "Evergrande highlights risks in China's offshore bond market". Financial Times. https://www.ft.com/content/d701aafd-a4bd-44e2-8ce4-678d1f92ea8d. 
  8. ↑ Hale, Thomas; Yu, Sun (2021-09-21). "China's property slowdown sends chill through the economy". Financial Times. https://www.ft.com/content/4b179ceb-bdd4-4d0a-b009-aea7c9ee0d8d. 
  9. ↑ 9.0 9.1 Lin, Andy; Hale, Thomas; Lockett, Hudson (2021-10-08). "Half of China’s top developers crossed Beijing’s ‘red lines’". Financial Times. https://www.ft.com/content/d5803d64-5cc5-46f0-bed0-1bc207440f9c. 
  10. ↑ "China Evergrande Group". https://www.fitchratings.com/entity/china-evergrande-group-88756458#ratings. 
  11. ↑ "Fitch Downgrades Evergrande and Subsidiaries, Hengda and Tianji, to 'B'; Outlook Negative". https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-evergrande-subsidiaries-hengda-tianji-to-b-outlook-negative-22-06-2021. 
  12. ↑ "Fitch Downgrades Evergrande and Subsidiaries, Hengda and Tianji, to 'CCC+'". https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-evergrande-subsidiaries-hengda-tianji-to-ccc-28-07-2021. 
  13. ↑ "Two more suppliers say payments are overdue from indebted Evergrande". 2021-08-03. https://www.reuters.com/business/two-more-suppliers-say-payments-are-overdue-indebted-evergrande-2021-08-03/. 
  14. ↑ "S&P downgrades China Evergrande again to 'CCC'". 2021-08-06. https://www.reuters.com/world/asia-pacific/sp-global-downgrades-china-evergrande-subsidiaries-2021-08-06/. 
  15. ↑ "Fitch Downgrades Evergrande and Subsidiaries, Hengda and Tianji, to 'CC'". https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-evergrande-subsidiaries-hengda-tianji-to-cc-07-09-2021. 
  16. ↑ Hale, Thomas (31 August 2021). "Heavily indebted Chinese developer Evergrande warns of default risk". Financial Times. https://www.ft.com/content/e870dd10-223c-411e-9e72-53c3b8e609b6. 
  17. ↑ "Factbox: China Evergrande's upcoming bond coupon payments" (in en). 11 October 2021. https://www.reuters.com/world/china/china-evergrandes-upcoming-bond-coupon-payments-2021-09-24/. 
  18. ↑ Hale, Thomas; Kinder, Tabby; Lockett, Hudson; Yu, Sun (2021-09-24). "Evergrande bondholders left in the dark as crucial deadline passes". Financial Times. https://www.ft.com/content/e7c0f31d-4dff-4992-88e6-a70402b7b4bc. 
  19. ↑ Hale, Thomas (2021-10-12). "Evergrande bondholders say they have not received $148m interest payments". Financial Times. https://www.ft.com/content/88dcb535-3945-4138-b394-dda82292b638. 
  20. ↑ Oct 21, Huileng Tan; 2021; Pm, 10:35. "Evergrande avoids default, repays $83.5 million worth of interest in dollar bonds" (in en-US). https://www.businessinsider.com/evergrande-repays-84-million-worth-of-interest-in-dollar-bonds-2021-10. 
  21. ↑ 21.0 21.1 Hale, Thomas; White, Edward (2021-09-29). "Evergrande sells $1.5bn bank stake to state-owned enterprise". Financial Times. https://www.ft.com/content/802e9d29-9ae4-441a-871c-edb8277dc7e2. 
  22. ↑ "Evergrande: Company set to update market on 'major transaction'" (in en-GB). BBC News. 2021-10-04. https://www.bbc.com/news/business-58784316. 
  23. ↑ Lockett, Hudson; Kinder, Tabby (2021-10-19). "Evergrande share trading halt pushes HKEX suspensions to record $61bn". Financial Times. https://www.ft.com/content/b3bb2c37-252b-430d-99dc-bde7b3d2f179. 
  24. ↑ 24.0 24.1 Hale, Thomas (2021-10-20). "Evergrande’s plan to sell property services division collapses". Financial Times. https://www.ft.com/content/63bfa855-4756-40fb-90ce-03e773d5b45b. 
  25. ↑ Lockett, Hudson; Hale, Thomas (2021-10-21). "Evergrande shares tumble after sale of services unit collapses". Financial Times. https://www.ft.com/content/bb043495-fffe-4e04-a6b6-7dd1016ddd4a. 
  26. ↑ 26.0 26.1 Hale, Thomas; Kinder, Tabby; Morris, Stephen (21 September 2021). "BlackRock and HSBC funds boosted Evergrande holdings as crisis loomed". Financial Times. https://www.ft.com/content/87fddf09-ef69-49b3-87bc-1a2d84fffd91. 
  27. ↑ "Chinese developer Sunac seeks to avoid Evergrande contagion". Financial Times. 2021-09-28. https://www.ft.com/content/1ffb1250-979b-409f-8f0a-b7fd93185399. 
  28. ↑ Lockett, Hudson; Hale, Thomas (2021-10-05). "China property sector woes deepen as midsize developer defaults". Financial Times. https://www.ft.com/content/01740d2e-4013-4781-930a-6cb62c8248dc. 
  29. ↑ "Chinese Developer Sinic Warns of Default as Hidden Risks Mount". Bloomberg.com. 2021-10-12. https://www.bloomberg.com/news/articles/2021-10-12/another-china-developer-warns-of-default-as-hidden-risks-mount. Retrieved 2021-10-12. 
  30. ↑ Hale, Thomas (2021-10-12). "Evergrande bondholders say they have not received $148m interest payments". Financial Times. https://www.ft.com/content/88dcb535-3945-4138-b394-dda82292b638. 
  31. ↑ 31.0 31.1 31.2 "Chinese developer Sinic defaults as Evergrande deadline looms". Financial Times. 2021-10-19. https://www.ft.com/content/1e79c466-c813-41de-a0b3-cbd27a983aaa. 
  32. ↑ Hale, Thomas; Langley, William; Lin, Andy (2021-10-20). "China new home prices hit by first month-on-month fall since 2015". Financial Times. https://www.ft.com/content/2764776a-2ee6-4cb2-94f8-05c4603dc6d5. 
  33. ↑ Yu, Sun (2021-09-26). "Chinese cities seize Evergrande presales to block potential misuse of funds". Financial Times. https://www.ft.com/content/595c3f50-755d-4dcc-afc3-4c993e50a936. 
  34. ↑ Hale, Thomas (2021-10-08). "Advisers say Evergrande failing to engage with investors as default looms". Financial Times. https://www.ft.com/content/4061a26a-2b73-4b85-b9a6-bf05551c2655. 
  35. ↑ Kinder, Tabby (2021-10-11). "Evergrande crisis puts PwC role in spotlight". Financial Times. https://www.ft.com/content/b60bc8d6-611b-41f9-b755-064054e27fab. 
  36. ↑ Hale, Thomas; Riordan, Primrose (2021-10-07). "Evergrande shareholder to delist in Hong Kong as contagion hits stock". Financial Times. https://www.ft.com/content/144052ed-a52c-47dc-a46f-6b4ddc2d0efd. 




Retrieved from "https://handwiki.org/wiki/index.php?title=Finance:Evergrande_liquidity_crisis&oldid=2500527"