Beijing The situation at the heavily indebted Chinese housing company Evergrande is worsening. For the first time, according to insiders, the second largest real estate developer in China has broken a deadline for interest payments.
Accordingly, the real estate company apparently did not service interest payments due on November 6, even after the 30-day waiting period had expired. As reported by several media citing people familiar with the matter, it is an obligation to pay $ 82.5 million in interest on foreign bonds.
In the past few months, Evergrande had missed the insolvency several times: the group had failed to meet regular payment deadlines on various occasions, but then always paid shortly before the expiry of a 30-day extension. Another of these deadlines expired on Monday.
The rating agency Standard & Poor’s is now assuming that payment default is “inevitable”.
Investors fear a domino effect that could spill over to other property developers and ultimately also affect the international financial markets.
Since the real estate market and related industries are estimated to contribute around a quarter of China’s gross domestic product, analysts have already lowered their growth forecasts for the world’s second largest economy.
Should the official default be determined, this would also affect bonds of other companies and cause further defaults.
Evergrande is the epicenter of a major quake that has struck the entire Chinese real estate sector. The shocks were triggered by measures taken by the Chinese government to get a grip on excessive debt and speculation.
This year, Bloomberg estimates that international bonds from Chinese debtors valued at more than ten billion dollars have defaulted, 36 percent of which were in the real estate sector.
Stricter government guidelines
Several real estate developers had failed to meet the stricter criteria for borrowing and had to reorganize their funding. This also includes the Kaisa Group. This company has a $ 400 million bond due Tuesday. It is still unclear whether Kaisa has met its payment obligations.
“The Evergrande case may just be the tip of the iceberg,” warns Alicia Garcia Herrero, chief economist for Asia-Pacific at French investment bank Natixis. The expert is particularly concerned about the increasing credit risks for companies with fewer assets than Evergrande, but which are exposed to the same regulatory pressure.
Herrero believes it is “very likely” that Evergrande’s offshore bondholders will face a haircut, although the extent is still uncertain.
According to Bloomberg data, Evergrande has more than $ 19 billion in international bonds outstanding. There is also around $ 8.5 billion on the Chinese market.
In view of the more restrictive policy, it is clear to the analyst that the “golden age of the Chinese real estate sector” is over. However, given its economic and social importance, the government in Beijing could not afford a collapse of the industry. “It is likely that the over-indebted property developers will be taken over by other companies at a reduced value,” says the expert.
Crisis with announcement
It was already announced at the end of last week that the crisis at Evergrande was worsening. On Friday, the government of the province where the company is headquartered stepped in after Evergrande issued a notice warning of a default.
As the government of Guangdong Province announced on Friday after the stock market closed, it would send a team to the company at Evergrande’s request to “reduce its risks, improve internal risk management and maintain normal business operations”. The Evergrande share then collapsed by 20 percent on Monday.
The real estate company has more than $ 300 billion in debt on its balance sheet. There is also speculation about other off-balance sheet liabilities. In the past few months, the company had made several attempts to raise liquid funds, for example by selling real estate or investments – apparently with limited success.
“Given the current liquidity status of the group, there is no guarantee that the group will have sufficient funds to continue meeting its financial commitments,” said Evergrande’s statement last Friday. The company wants to “actively work with the offshore creditors to create a workable restructuring plan for the company’s offshore debt for the benefit of all parties”.
The Chinese leadership tried to allay investor worries over the weekend. The Evergrande case has no impact on normal financing in the real estate market, the headline “Economic Daily”, a Communist Party-controlled newspaper, said on Saturday.
The Evergrande risk case is an “isolated phenomenon” in the market economy and should “not be overestimated, but it should serve as a warning to other real estate companies and underline the importance of a solid way of working”, the article said.
“Own mismanagement” and “breakneck expansion”
Previously, in what appeared to be a coordinated action, several Chinese authorities tried to appease with individual statements on Friday, including the Chinese Central Bank (PBOC), the Banking and Insurance Supervisory Authority (CBIRC), the Chinese Securities and Exchange Commission (CSRC) and the Ministry of Housing and Rural Development (MHURD).
Evergrande’s problem is mainly caused by “its own mismanagement” and “breakneck expansion,” according to the PBOC website. The CSRC announced that the real estate industry is generally doing well right now. Most real estate companies were focused on their core business and performed solidly. The effects of the risk incident at the Evergrande Group on the stable functioning of the capital market are “controllable”, it said.
Wang Dan, chief economist at Hang Seng Bank in Shanghai, also assumes that the situation is “under control”. The local government had “not the intention to completely save Evergrande, but signaled a partial rescue”.
The central bank will participate in resolving Evergrande-related non-performing loans (NPL) from regional banks. Wang and other experts believe Evergrande should serve as an example for other leading real estate companies to be more careful with their debt.
Citigroup experts also see the intervention of the regional authorities in the Evergrande case as the beginning of “an orderly restructuring”. Despite the signs of default, this is good news for the markets, especially because the government in Beijing now has the chance to better manage the economic slowdown triggered by the turbulence in the real estate sector.
The Chinese central bank has already given the banking sector more leeway for lending. For the second time this year, this week it cut the amount banks must hold as minimum reserves. As of December 15, the institutes will have to hold the equivalent of around 167 billion euros less capital. This corresponds to a reduction in the reserve rate for commercial banks by half a percentage point. The lower this rate, the more loans the banks can grant.
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