Evergrande’s rising default risk: All you need to know – Times of India

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One of China’s biggest real estate developers, Evergrande had an outstanding debt of 2 trillion yuan ($310 billion), as of June 30 — the largest for any publicly traded real-estate management or development company in the world.
Of this total outstanding debt, 240 billion yuan ($37.3 billion) was due in the next one year. This debt amount was nearly three times Evergrande’s cash holdings worth 86.8 billion yuan ($13.5 billion).
Reports of extreme cash crunch faced by the company has made prospective homebuyers wary of investing as the real estate giant reported a fall in sales in its latest financial results.
Testing week
Besides, a major possibility of default looms for the company this week as it is due to $83.5 million in interest relating to it March 2022 bond on September 23.
While, it is due to make another payment of $47.5 million on September 29 for its March 2024 notes.
Evergrande will default on both the bonds if its fails to settle the interest within 30 days of the payments becoming due.
How trouble began
For years now, the economists of the country have been warning of a potential threat owing to the rising debt levels in the economy.
The Communist Party, led by President Xi Jinping, recently announced that it will reduce the financial risk facing the economy.
Authorities have stepped in curb rampant borrowings by real estate firms in hopes of providing an asset bubble. The property management sector was also instructed to improve order.
Regulatory authorities stepped by efforts after the coronavirus pandemic battered the real estate market completely. That’s when problems began to mount for Evergrande as well.
The country total borrowing — including corporate, government and household — jumped to nearly 300 per cent of economic output in 2020 as against 270 per cent in 2018.
According to reports Evergrande also borrowed heavily, including by by requiring employees of its construction contractors to buy its debt.
The developer also financed construction with the help of short-term IOUs, known as commercial bills, that it issued to contractors and building-materials suppliers.
Epitome of China’s housing sector
The once-mighty Evergrande Group was an epitome of the housing sector in China with people lining up to get possession of a house. Some even made full cash payments upfront for homes that took years to be built.
Evergrande was founded in 1996 and is one of the country’s largest builders of apartments, office towers and shopping malls. It has now also forayed into electric vehicles, theme park development, health clinics, mineral waters and other businesses.
It employs more than 2 lakh workers and supports 3.8 million jobs in the sector. At present, it has 1,300 projects spanning across 280 cities.
The company’s founder Xu Jiayin was China’s richest businessman in 2017 with a net worth of $43 billion.
Spillover effect: Global stocks crash
Evergrande’s shares tumbled more than 10 per cent on Monday as Chinese regulators warned that its $305 billion in liabilities could lead to widespread losses in China’s financial system if its debts are not stabilised.
The S&P 500 tumbled 1.7 per cent on Monday to 4,357.73, its biggest drop since May. The S&P 500 was coming off two weeks of losses and is on track for its first monthly decline since January.
The Dow Jones Industrial Average fell 1.8 per cent to 33,970.47. The Nasdaq shed 2.2 per cent, to 14,713.90. The Russell 2000 dropped 2.4 per cent to 2,182.20.
Asian shares mostly declined Tuesday, with Tokyo down 2.2 per cent as worries about heavily indebted Chinese real estate developers weighed on sentiment.
China’s Lehman moment?
The crisis at Evergrande has fuelled speculations that it could be a replay of the Lehman Brothers bankruptcy that happened during the 2008 global financial slowdown.
Lehman Brothers, a global financial services firm, was of one the leading companies on Wall Street. The company ran into bankruptcy in 2008 majorly due to sub-prime mortgage crisis.
The firm went bankrupt, forcing US authorities to shut it down.
This led to a banking crisis and stock markets crashed, which led to millions of people losing their jobs.
However, analysts have downplayed the possibility of such a huge financial crisis and ripple effects at Evergrande. They expect the government to prevent such a scenario from arising.
According to news agency AP, Lehman’s assets included financial instruments whose prices can swing wildly. Whereas, Evergrande has 1.4 trillion yuan ($215 billion) of land and partially completed projects with relatively stable prices.
In the unlikely event of an outright default, China’s banking system has an annual profit of 1.9 trillion yuan and reserves of 5.4 trillion yuan against bad loans, “which could easily absorb the loss,” Larry Hu and Xinyu Ji of Macquarie Group said in a report.
What does the Chinese govt say
The Chinese government has been largely quiet on the crisis at Evergrande, and there was no mention of the firm’s troubles in major state media during a public holiday.
Investors are waiting to see what Chinese regulators might do, but analysts say they appear to be focused on protecting home buyers by ensuring apartments already paid for are completed.
The government has injected money into other insolvent Chinese companies, but economists say Beijing appears determined to avoid doing that with Evergrande.
‘Evergrande will walk out of its darkest moment’
In an effort to revive battered confidence in the firm, Evergrande chairman Hui Ka Yuan said in a letter to staff the company is confident it will “walk out of its darkest moment” and deliver property projects as pledged.
In the letter, coinciding with China’s mid-autumn festival, the chairman of the debt-laden property developer, also said Evergrande will fulfil responsibilities to property buyers, investors, partners and financial institutions.
“I firmly believe that with your concerted effort and hard work, Evergrande will walk out of its darkest moment, resume full-scale constructions as soon as possible,” said Hui, without elaborating how the company could achieve these objectives.
(With inputs from agencies)
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