For several months, China Evergrande Group has been shrouded in this question: Is the developer with the most debt in the world too big to fail?
Investors finally have the answer.Use one A series of announcements This week, Evergrande’s bonds plunged to historical lows. The company and Beijing made it clear that the real estate giant of billionaire Xu Jiayin will conduct one of the largest debt restructurings in China’s history.
Unless there is a last-minute shock, holders of $19.2 billion Evergrande U.S. dollar bills will face a sharp cut because the company has completely reformed its huge balance sheet without government bailout – this This process can be long, controversial and risky for Asia’s largest economy.
Although the rating company has not announced a formal default, at the end of the 30-day grace period on Monday, holders of the two bonds under Evergrande have not yet received overdue coupons. Standard & Poor’s Global Ratings said on Tuesday that developer defaults are “inevitable.” Evergrande did not immediately respond to a request for comment.
These developments marked the end of the huge real estate empire founded by Mr. Xu 25 years ago, and sparked a long-term struggle over who gets paid from the remaining property. Evergrande said in a brief exchange document on Friday that it plans to “actively engage” with overseas creditors on the restructuring plan. People familiar with the matter said on Monday that the company plans to restructure all its offshore public bonds and private debt obligations.
As of June, Evergrande’s disclosed total liabilities exceeded US$300 billion, making it the biggest victim of President Xi Jinping’s severe crackdown on reckless real estate industry and real estate speculation. Beijing’s unwillingness to bail out the developer sent a clear signal that the Communist Party will not tolerate large-scale debt accumulation that threatens financial stability.
The question now is whether the government can limit the impact. The stocks and bonds of smaller, lower-rated real estate companies have plummeted. Since concerns about Evergrande’s financial situation intensified in June, at least 10 onshore or offshore bonds have defaulted. Kaisa Group Holdings Co., Ltd., the main issuer of US dollar bonds, has also been pushed to the brink in recent days.
The yield on junk dollar bonds has soared to more than 20%, making it prohibitively expensive for capital-strapped companies to borrow from overseas. Housing sales and prices plummeted, adding another resistance to the slow-growing economy.
“They are playing with fire,” said Cathie Wood, the head of Ark Investment Management, which reduced its holdings of Chinese stocks earlier this year.
At present, the Chinese authorities are sending a signal that they plan to surround Evergrande and limit the infection, instead of carefully planning rescues as in past crises.
The People’s Bank of China reiterated on Friday that the risks posed by Evergrande’s debt crisis to the economy can be controlled, citing the problems faced by the developers as a result of “self-management” and “reckless expansion”. The China Banking and Insurance Regulatory Commission stated in a separate statement that real estate development and acquisition loans should be issued in a “reasonable” manner.
The latest financial system support measures were introduced on Monday, and the People’s Bank of China released about 1.2 trillion yuan (188 billion US dollars) of liquidity by lowering the deposit reserve ratio of most banks. The government’s commitment to support the housing market to better meet “reasonable” demand further demonstrates that restrictions on real estate will be relaxed.
Officials have also played a more practical role in Evergrande. Chairman Xu was summoned by the Guangdong Provincial Government last week after the company said it planned to work with creditors to develop a restructuring plan. According to a statement on December 3, the authorities in the province where Evergrande is located will send a working group to urge builders to manage risks, strengthen internal controls, and ensure normal operations.
So far, the containment measures have not reassure investors. Although the pain of China’s smaller offshore credit market has been largely contained so far, this is no consolation for developers who rely heavily on international investors to raise funds. For companies with the weakest balance sheets, including Kaisa and Fantasia Holdings Group, borrowing costs have soared.
According to data compiled by Bloomberg, Chinese borrowers defaulted on a record amount of US$10.2 billion in offshore bonds this year, of which real estate companies accounted for 36% of the total.
Jenny Zeng, co-head of Alliance Bernstein’s Asia-Pacific fixed income division, said that “the market is under great pressure,” and about half of the country’s developers are in serious financial distress and pricing high default risks.
Despite this, China’s larger, higher-rated developers, such as Longfor Group Holdings Co., Ltd. and Country Garden Holdings Co., Ltd., have performed far better than their lower-rated competitors. Country Garden is the largest developer by sales, and its 2031 bonds rebounded to 88 cents after falling to 73 cents last month. The 2024 notes sold by Vanke, the second largest company, have risen above par value.
“We expect industry differentiation to continue,” said Iris Chen, an analyst at Nomura Securities’ credit department. Refinancing, which will further strengthen their liquidity. “
China is also trying to limit the impact on the broader real estate market. In China, real estate accounts for about a quarter of economic output and 75% of household wealth. After plummeting sales and housing prices falling for the first time in six years, China’s real estate market depression has intensified in recent months.
Preliminary data from China National Real Estate Information Corporation show that in November, the contracted sales of the top 100 developers in the country fell 38% year-on-year to 751 billion yuan, which was a 32% increase from the previous month.
Any slowdown in real estate may have a knock-on effect not only on the Chinese economy but also on global growth. China’s economic growth slowed in the third quarter, and there are signs that there will be more pain in the future. The Fed warned last month that if China’s commercial real estate industry deteriorates sharply, its vulnerabilities may spread to the United States. China’s real estate industry accounts for nearly half of the world’s dollar-denominated non-performing debt.
“Think about if we lose China, we will face cyclical risks,” Wood of Ark Investment said at the recent Milken Global Conference. “On the margins, China is responsible for huge cyclical growth.”
The Chinese government did not stand idly by. President Xi presided over a meeting of the Political Bureau of the CPC Central Committee on Monday, and at the end of the meeting sent a signal to relax real estate regulation. The leadership team came together before the broader annual economic meeting that set goals for the coming year, promising to stabilize the economy by 2022.
For global bondholders, Evergrande’s default may trigger a protracted repayment war. The Chinese authorities have made it clear that the company should place buyers, suppliers and retail investors who purchase the company’s wealth management products before creditors. About 1.6 million home buyers have paid Evergrande deposits for unfinished properties.
“Regardless of the outcome, offshore bondholders are the last ones, and they will definitely accept the cut, which may be a major cut,” said Andrew Collier, managing director of Hong Kong Orient Capital Research.
With Evergrande’s US dollar bills trading at approximately 20 cents per US dollar, the market has priced the discount at around 80%. Gary Ng, senior economist at Natixis SA, said that the key to bondholders is whether the company can accelerate home sales and offload assets to raise cash in order to start paying off debt.
According to data compiled by Bloomberg, Evergrande’s offshore note holders include Ashmore Group Plc and UBS AG. Just as Evergrande’s stock and bond prices plummeted, Ashmore purchased another $100 million in bonds issued by the developer or its subsidiaries in the third quarter. Data show that as of the end of September, these transactions made holdings more than 500 million U.S. dollars.
AXA SA Asia fixed income director Jim Veneau said that further market reaction to Evergrande’s default payments may depend on the outcome of the restructuring process.
“An orderly reorganization allows the company to operate as normally as possible and avoid the sale of non-performing assets, which will greatly help contain further damage to the entire industry,” Veneau said.
In dollar terms, the biggest loser may be Xu, the founder of Evergrande, who owned more than 70% of the company’s shares before the recent stock sale. According to the Bloomberg Billionaires Index, this year’s plunge in Evergrande’s share price has shrunk the chairman’s wealth by 73%, or about $17 billion. The Hui was once the second richest person in China and now ranks 75th.
Over the years, the son of a poor lumberjack established one of China’s largest real estate companies, and later ventured into electric cars, tourism and football clubs, and has been able to rely on the support of Beijing or other tycoons to save him. This time, he appeared alone.