Evergrande's Debt Crisis |
Credit: Capital.com |
What is Evergrande?
• Evergrande is one of the biggest real estate developers in China. The company made its name in building residential properties.
• It was founded in Guangzhou in 1996 by Chinese billionaire Xu Jiayin.
• Evergrande eventually diversified into electric vehicles, sports & theme parks, food & beverage business, bottled water, groceries & dairy products.
• As per the company's website, it currently owns more than 1,300 projects in over 280 cities across China. It also employs around 200,000 people & generates more than 3.8 million jobs each year.
The Debt Crisis Explained
• Evergrande's debts ballooned as it borrowed to finance its other projects. It also sold apartments at a faster rate even with low margins with the hope to raise cash and buy land again.
• On September 14, the company disclosed in a stock exchange filing that it was having trouble finding buyers for some of its assets and hence its plans to raise money failed to make any progress
• Evergrande's interest-bearing debt stood at 571.8 billion yuan ($89 billion) at the end of June, according to the company's interim report. It was 716.5 billion yuan at the end of 2020. Its total liability stood at 1.97 trillion yuan, accounting for about 2 percent of the country's GDP.
• Banks have also responded to the company's deteriorating cash flow. According to Reuters, some banks in Hong Kong (including HSBC and Standard Chartered) have declined to extend new loans to buyers of two uncompleted Evergrande residential projects.
• Rating agencies have repeatedly downgraded the firm, citing its liquidity problems.
• Its share price plunged nearly 80% so far this year, and trading of its bonds was repeatedly halted by Chinese stock exchanges in the past weeks.
What can Happen next?
• Banks, suppliers, home buyers and investors are all likely to feel the heat of a bankruptcy if it happens.
• According to JPMorgan estimates, China Minsheng Bank has the highest exposure to Evergrande.
• Evergrande also holds 4 percent of Chinese real estate high-yields in the dollar bond market, DBS has estimated. Defaults would trigger sell-offs in the high yield credit market as well.
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