Evergrande Faces Confidence Crisis Over $ 120 Billion Debt

China Evergrande Group is facing a crisis of confidence among creditors who have loaned the world’s most indebted developer more than $ 120 billion.

Long-standing doubts about the real estate giant’s financial health came to light Thursday, following reports that had sent a letter to Chinese officials warning of a possible cash shortage that could pose systemic risks. The news sparked an exodus of bondholders that continued through Friday, causing the price of Evergrande’s yuan note due 2023 to drop as much as 28% to a record low. Losses on the company’s dollar bonds spread to high-yield debt in Asia.

Evergrande said in a statement that the rumors and documents circulating online were “fabricated” and “pure libel,” without directly commenting on whether it had warned officials of a possible cash shortage. The developer, controlled by billionaire Hui Ka Yan, said it generated 400 billion yuan from project sales in the first eight months and maintains healthy operations. Evergrande obtained approval from the Hong Kong Stock Exchange to spin off its property management unit, it said Friday, paving the way for it to raise much-needed capital.

That did little to boost investor sentiment, however, as Evergrande shares fell 9.5% to the lowest level since May at the close of trading in Hong Kong.

The biggest short-term market concern relates to a deal Evergrande reached with some of its biggest investors. It gives them the right to demand their money back if the company fails to get approval to list on the Shenzhen Stock Exchange before January 31st. The repayment could be as high as 130 billion yuan ($ 19 billion), or about 92% of Evergrande. Cash and cash equivalents. At least one of the investors has He indicated that he would not be willing to extend the term.

Asia’s junk bond giant threatens an already fragile market

In another sign of growing concern among creditors, at least five Chinese banks and two trust firms held emergency meetings Thursday night to discuss their exposure to Evergrande and access to collateral, people familiar with the matter said. Among them was China Minsheng Banking Corp., whose exposure to Evergrande exceeds 29 billion yuan, one of the people said. Minsheng Bank declined to comment.

At least two of the banks that called meetings on Evergrande decided to ban the company from drawing unused lines of credit, according to people familiar with it. The developer had credit lines of 503 billion yuan as of June 30, of which 302 billion yuan was not used.

“Regardless of the authenticity of the letter, we believe that the situation may have a prolonged negative impact,” wrote Manjesh Verma and Stella Li, credit analysts at Citigroup Inc., in a report. “There is increasing concern among various investors and lenders and thus increasing the difficulty of accessing financing and refinancing.”

Evergrande has long been seen as a model for highly leveraged companies in China, where corporate debt rose to a record 205% of gross domestic product in 2019 and has likely risen further this year as companies increased debt. to recover during the pandemic. Evergrande has turned to banks, shadow lenders, and the bond market in recent years to expand beyond the real estate industry into businesses ranging from electric cars to hospitals to theme parks, areas that often align with the political priorities of Chinese President Xi Jinping.

While it’s unclear why Evergrande has yet to get approval for its listing plan, some analysts have speculated that it could be related to China’s efforts to control high home prices and restrict fundraising by private investors. developers. Regulators have been using a wide range of political levers since 2016 to deter speculative home buyers, curb costly land prices, and restrict lending to residential builders.