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China Evergrande Group has been asking the question for months: is the world’s most indebted developer too big to fail?
Investors finally have the answer. with a a bunch of predictions With the Evergrande bonds falling to its lowest level this week, the company and Beijing have made it clear that the huge property of billionaire Hui Ka Yan is going to be one of the largest debt restructurings ever in China.
With the exception of a last-minute shock, $ 19.2 billion in Evergrande dollar bills have deep haircuts as the company revises its huge balance sheet without government bailouts – a process that could be lengthy, controversial and dangerous for Asia’s largest economy.
Although the rating companies have yet to declare the default officer, the holders of two bonds issued by an Evergrande unit did not receive an overdue coupon payment on Monday at the end of the 30-day grace period. S&P Global Ratings said Tuesday that the developer’s default was “inevitable.” Evergrand did not immediately respond to a request for comment.
Developments mark the beginning of the end of the vast real estate empire that Hui began 25 years ago, starting a long struggle over who is being paid what is left. Evergrand said in a brief exchange on Friday that it wants to “actively engage” in a restructuring plan with offshore creditors. The company said Monday that it intends to include all its offshore public bonds and private debt obligations in the restructuring, people familiar with the matter said on Monday.
Evergrande, which reported more than $ 300 billion in liabilities through June, is the biggest victim of President Xi Jinping’s efforts to crack down on the free real estate sector and reduce real estate speculation. Beijing’s reluctance to rescue the developer sends a clear signal that the Communist Party will not accept the massive accumulation of debt that threatens financial stability.
The question now is whether the government can limit the fall. Already, shares and bonds of lower-rated real estate companies have fallen. At least 10 people have failed in their land or sea bonds since their growing concern over Evergrand’s financial health increased in June. Kaisa Group Holdings Ltd., the main issuer of dollar bonds, has also been pushed to the limit in recent days.
Dollar bond yields have risen by more than 20%, and it is extremely expensive for low-income companies to borrow at sea. Home sales and prices have risen, adding another headwind for the economy, which is struggling with slow growth.
“They’re playing with fire,” said Cathie Wood, head of Ark Investment Management, which reduced its stake in China earlier this year.
For now, Chinese authorities are indicating that they intend to ring Evergrande and limit pollution instead of orchestrating a rescue, as they have done in past crises.
The People’s Bank of China reiterated on Friday that the ever-increasing debt crisis could hold back the risks to the economy, citing the developer’s “mismanagement” and “irresponsible spread” over its problems. The Banking and Insurance Regulatory Commission of China said in a separate statement that loans for real estate development and purchases should be provided on a “reasonable” basis.
The latest measures to support the financial system came on Monday, when China’s central bank released about 1.2 trillion yuan ($ 188 billion) in liquidity, reducing the reserve requirement ratio for most banks. The government pledged to better meet the “reasonable” needs to support the housing market by adding to the signs that it will ease real estate restrictions.
Officials are also taking on a more practical role at Evergrand. President Hui called on the Guangdong government last week to say it intends to work with creditors on a restructuring plan. Authorities in Evergrande’s original province will send a working group to the manufacturer to ask for risk management, as well as to strengthen internal controls and ensure normal operation, according to a December 3 note.
To date, efforts to contain it have not reassured investors. Although it has been a pain in China’s smaller offshore credit market so far, this is little consolation for developers who have relied heavily on international investors to raise funds. Borrowing costs have risen for companies with weaker balance sheets, such as Kaisa and Fantasia Holdings Group Co.
In total, Chinese lenders have set a record $ 10.2 trillion in offshore bonds this year, with real estate companies accounting for 36 percent of the total, according to data collected by Bloomberg.
“There is extreme stress in the market,” said Jenny Zeng, head of fixed income at the Pacific Asia Alliance, said half of the country’s developers are in deep financial turmoil and prices are at high risk of default.
However, higher rated Chinese developers such as Longfor Group Holdings Ltd. and Country Garden Holdings Co. hold much better than their lower rivals. Country Garden, one of the largest developers in terms of sales, has recovered its 2031 bond to 88 cents a dollar after falling to 73 cents last month. China Vanke Co., the second-largest company, has sold 2024 banknotes in sales.
“We expect continued divergences in the sector,” said Iris Chen, a credit bureau analyst at Nomura Securities Co. “High-quality game survivors will benefit even if their incomes are already relatively high, as they will have a better chance of restarting the normal. Refinancing, which will further strengthen their liquidity.”
China is also trying to curb the fall in the wider housing market, a country that accounts for a quarter of real estate production and 75% of household wealth. The decline in China’s housing stock has intensified in recent months as sales have fallen and house prices have fallen for the first time in six years.
Sales of the country’s top 100 developer contracts fell 38 percent from a year earlier in November to 751 billion yuan, a sharp drop from a 32% drop in the previous month, according to preliminary data from China Real Estate Information Corp.
US Federal Reserve warns that Chinese real estate market problems could spread to US economy [File: Al Drago/Bloomberg]Any slowdown in real estate could have a major impact not only on the Chinese economy, but also on global growth. China’s growth slowed in the third quarter, a sign that more pain is coming. The Federal Reserve warned last month that the fragility of China’s commercial real estate sector could spread to the U.S. if it worsened dramatically. China’s real estate sector accounts for nearly half of the world’s troubled dollar-denominated debt.
“Think about the cyclical risk there if we lose China,” Ark Investment’s Wood said in a new Milken Global Conference. “On the margins, China has been responsible for the tremendous cyclical growth.”
The Chinese government is not tolerated. President Xi oversaw a meeting of the Communist Party’s Politburo on Monday, which ended with a signal to ease real estate cuts. The board of directors, meeting ahead of a broader annual economic session that sets goals for next year, pledged to stabilize the economy in 2022.
For global bondholders, it’s likely to start a long battle to return Evergrand’s defaults. Chinese authorities have made it clear that the company must put home buyers, suppliers and retail investors – who bought products to manage the company’s wealth – ahead of debtors. About 1.6 million homebuyers have placed deposits on Evergrande for unfinished real estate.
“Whatever the outcome, they are on the bottom line of paying offshore bonds and will certainly have to accept haircuts that may be significant,” said Andrew Collier, managing director of Orient Capital Research Inc. in Hong Kong.
Since Evergrande’s banknotes sell for about 20 cents a dollar, the market is already cutting hair by about 80%. The key to the bonuses is to raise money for the company to accelerate home sales and unload assets to start settling its liabilities, said Gary Ng, a senior economist at Natixis SA.
“Orderly Restructuring”
Evergrande’s offshore banknotes included Ashmore Group Plc and UBS AG, according to data collected by Bloomberg. Although Evergrander’s stock and bond prices fell, Ashmore bought another $ 100 million issued by the developer or its subsidiaries in the third quarter. Negotiations reached more than $ 500 million by the end of September, data show.
Jim Veneau, AXA SA’s head of fixed income in Asia, said that the market’s reaction could affect how the restructuring process behaves in the face of Evergrand’s payments.
“An orderly restructuring, where the company can carry out its operations as normally as possible and refrain from the sale of impaired assets, will significantly help maintain more damage throughout the sector,” Veneau said.
The biggest loser in terms of the dollar may be Hui’s founder Hui, who once owned more than 70% of the company before the last share sale. Evergrander’s share price drop has reduced the president’s wealth by 73% this year, to about $ 17 billion, according to the Bloomberg Billionaires Index. Once the second richest man in China, Hui is now ranked 75th.
For many years, the son of a poor lumberjack who went into electric vehicles, tourism and football clubs after building one of China’s largest real estate companies has been able to count on the help of Beijing or other tycoons to rescue him. . This time, he appears on his own.
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