Any investor would be right to be on the edge of their seat watching the Evergrande saga unfold.
What happens next?
One problem: Chinese traders are on vacation. The Mid-Autumn Festival sees the Shanghai markets closed until Wednesday, giving investors around the world time to painfully mull over how Evergrande could hurt their portfolios.
Debt obligations (3333.HK) remain unchanged and deadlines set, while prospects for restructuring become clearer.
Evergrande’s impending debt obligations and its ability to meet them
Evergrande has used significant debt financing to fuel the rapid expansion that has made it one of China’s largest companies, with operations spanning not only real estate, but also consumer goods, financial services, electric vehicles and a sports franchise.
UBS, the Swiss bank, estimates the group’s total liabilities at $ 313 billion, which consists mostly of domestic bank loans and $ 19 billion in dollar-denominated bonds.
Monday marked a deadline for national bank loan repayments, with a 24-hour grace period until Tuesday. Chinese authorities warned banks last week that Evergrande would not meet these obligations.
A series of bond coupon payments worth around $ 120 million are due Thursday, which is the interest paid to bondholders, as
(HSBC). In a note Tuesday, analyst Jeffrey Halley of broker Oanda said Evergrande has 30 days from Thursday to make those interest payments before officially defaulting.
UBS macro strategists, led by Kamil Amin, now consider a significant credit default inevitable.
The developer may also face other obligations unrelated to debt financing.
Evergrande has apparently used billions of dollars selling wealth management products to retail investors to fill gaps in its balance sheet, according to a Financial Times report. Some of these investors took to the streets, protesting outside the Evergrande offices and demanding their money back. One solution that the group has offered to investors is to be reimbursed in the form of real estate.
But some of the properties offered by Evergrande may still be under construction – at a standstill, for now.
So how will Evergrande pay off its debts?
The developer has around $ 15 billion in cash, which is nowhere near enough to pay the bills. It also faces a serious liquidity problem, as it does not have enough money to complete the construction of existing projects, which could be sold to generate cash. Add to that the reality of the slowdown in the Chinese real estate market, and the outlook grows darker.
But Evergrande has total assets of around $ 367 billion, as of the end of June, which means there’s plenty to do with a restructuring.
What will China do about Evergrande?
Chinese authorities appear to have three main choices: let Evergrande go bankrupt and liquidated, save it in some form – like a debt-for-equity swap – or take control of a restructuring.
Last week, the editor of the country’s flagship state newspaper said Evergrande should not expect a government bailout on the assumption that it is “too big to fail,” Reuters reported.
Analysts consider total failure unlikely because much of Evergrande’s debt is held by domestic banks backed by the Chinese government.
There is little incentive to let Evergrande fail completely because the downside risk is enormous. These include the risk of a domino effect on domestic lenders, which could lead to a credit crunch and the beginnings of a domestic financial crisis, not to mention global investor sentiment towards China or the US. Chinese corporate debt outlook.
Even if regulators want to make an example of the developer – who embodies the risks of the wild real estate market that they have tried to control – there are other ways of doing it.
How could Evergrande be restructured?
The Chinese government has already sent a restructuring team to Evergrande, ING Bank Greater China chief economist Iris Pang wrote in a note on Tuesday.
The complexities of Evergrande’s sprawling commercial network would make restructuring particularly difficult.
One area of interest could be the coastal province of Shandong, where Evergrande’s investments include a bank, a pharmaceutical company and a highway company, Pang noted.
Pang said one of the most embarrassing issues is the bank that Evergrande has invested in. “Did she also loan to Evergrande?” Has it been exposed to other companies that have loaned or done business with Evergrande? What other banks do business with this bank and what are their exposures? These are questions we don’t have answers to, ”the economist said.
ING has said it expects the government’s restructuring team to at least help Evergrande raise capital, which would be helpful in completing construction projects that could then feed the starving company further.
This process could begin with the sale of interests in non-core businesses, that is, non-residential real estate, to a third party, such as a public company. This would add some time to Evergrande’s countdown, allowing it to continue operating as the restructuring turns into core business segmentation. Pang doesn’t think it’s inevitable that Evergrande will eventually become a state-owned enterprise.
“The only comment we think we can make with any degree of certainty is that the restructuring process is likely to be long,” Pang said. “We don’t anticipate a full and comprehensive response to the current market anxiety anytime soon.”
Should investors buy the downside?
The immediate outlook for equities remains difficult. Advice from strategists on buying the trough
Dow Jones Industrial Average
There is a risk of falling US corporate profits, including the prospect of higher taxes, and stock valuations are threatened by rising bond yields.
It comes as the U.S. Federal Reserve plans to slow or scale back its monthly asset purchase program in the era of the Covid-19 pandemic, which is adding liquidity to markets. Indications of the pace of a decline – which could occur as early as tomorrow – may cause stocks to falter even more.
“While the stock market is at the height of its seasonal weakness in September, now is not a good time to buy lower stocks in the broader indexes,” said George Ball, chairman of the company. Sanders Morris Harris investment, in a note Tuesday. .
This may be a different story for Chinese banks exposed to Evergrande.
In a report released on Monday, Citi strategists highlighted the various credit risks of developers in the industry, noting that
Ping a bank
(000001. China), and
(601818. China) presented the highest risk, with
Bank of Nanjing
Chongqing Rural Commercial Bank
Postal Savings Bank of China
(601658.HK) being less vulnerable.
“We would see any decline as an increased opportunity to buy quality names,” the strategists wrote.
Write to Jack Denton at email@example.com