The second largest Chinese real estate developer is in financial difficulties.
(Photo: Reuters)
Beijing The crisis surrounding the Chinese housing company Evergrande is widening more and more. The defaulted company let the deadline for further interest payments on offshore bonds traded in US dollars pass, as several media reported on Tuesday, citing some bondholders. Accordingly, coupon payments totaling $ 148 million would have been due for bonds with maturities in April 2022, April 2023 and April 2024.
Evergrande has more than $ 300 billion in debt on its balance sheet. There is also speculation about further off-balance sheet debts. On September 23, the company failed to make interest payments on bonds that were traded in US dollars. However, the bond is only deemed to have defaulted after a 30-day grace period.
While Evergrande is making the most of the headlines right now, the problem is deeper: According to Bloomberg data, missed payments by real estate companies now account for 36 percent of the record-breaking 175 billion yuan ($ 27.1 billion) in onshore corporate bonds this year failed.
Several other real estate developers have now stumbled.
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• Shanghai-based Sinic Holdings announced on Tuesday that it is unlikely to be able to repay a $ 250 million bond due on October 18.
• Real estate developer Modern Land reported on Monday that it wanted to ask investors to postpone a repayment date for outstanding bond debts.
• Competitor Fantasia failed to repay $ 206 million US dollar bonds due on October 4. As a result, two members of the board of directors resigned. Now the board of Fantasia consists of only one member, which violates stock exchange admission regulations. The company announced on Friday that it had hired Houlihan Lokey as a financial advisor to review its capital structure and overcome the liquidity crisis.
The storm is unlikely to be over by a long time
The reason for the streamlining in China’s real estate market are measures taken by the Chinese government. In the past few months, it had taken some measures to cool the hot market. Home loans have been made more restrictive and, in particular at the local level, more restrictions have been imposed on private individuals to buy property. However, a measure at the end of 2020 is seen as the key moment in which the entire sector began to falter.
At that time, the government imposed new credit restrictions on property developers, the so-called “three red lines”. As a result, the entire industry had to reorganize its financing.
And the storm shouldn’t be over by a long time, because the renovation is in full swing. According to an analysis by the Financial Times, in June 2021 almost half of the 30 largest property developers in China still violated at least one of the new rules that real estate developers must have complied with by 2023. First, they state that the ratio of liabilities to assets must be less than 70 percent. Second, developers are allowed to have a maximum net debt ratio of 100 percent, and third, the ratio of cash to short-term debt cannot fall below a certain limit.
On top of that, however, due to the ongoing crisis in the industry, yields on Chinese dollar junk bonds, the majority of which were issued by real estate companies, rose to 17.5 percent, according to Bloomberg – the highest level in about a decade. For the industry, this means that the important source of funding through bond issues has practically dried up.
According to experts, if the real estate market goes too far downhill, the Chinese government has some options to stabilize the sector. For example, it could postpone the deadline by which the developers must comply with the “three red lines” further into the future. It could also ensure that home loans are granted again more quickly and easily in order to increase demand. The construction of social housing could also support the market. Most analysts believe that as long as the pressure on the sector does not become too strong, Beijing will not change the tough course it has taken.
A message from the Central Commission for Disciplinary Inspection of the Communist Party on Monday caused further unrest. According to this, for the first time in six years the country’s financial supervisory authorities, the largest state banks, insurance companies and administrators of bad loans are to be examined in order to fight corruption.
A team led by the Central Disciplinary Inspection Commission will initiate a two-month review of China Banking and Insurance Regulatory Commission (CBIRC) and receive complaints from whistleblowers by December 15, a statement said Monday.
Observers fear that the controls could also lead to punitive measures such as fines or stricter regulation of lending, which could have a negative impact on financial companies.
More: “Financial debauchery will be punished” – The consequences of China’s new debt policy