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Evergrande Crisis: A Case Study

Over the past few weeks, the financial and economic world has been worried about the likely collapse of Evergrande, the most indebted real estate company in the world right now.

The company has hit a series of deadlines for bond interest payments, struggling to meet $300 billion of repayments to lenders. As the company struggles to meet those payments, it has started to repay some investors in its wealth management business with property.

CHINESE HOUSING MARKET

Evergrande, China’s largest housing developer, has been in the news for weeks. It also has 1.6 million unused houses hanging in the balance.

The total market value reached $52 trillion by 2019 – twice the size of the American housing market reports The Wall Street Journal. It is estimated that there are 65 million homes – 20% of total purchases – in China are unoccupied. Not only is this high by international standards, it means there are enough empty houses in China to accommodate all French people.

“Over the past two or three decades, the price of Chinese goods has risen,” Sun said. “This has created a popular belief in China that housing is always safe to invest in.”


EVERGRANDE GROUP


Evergrande Group or Evergrande Real Estate Group is the second-largest real estate developer in China. It is ranked 122nd in the Fortune Global 500. China Evergrande Group is an investment management company, involved in development, investment, and property management. The firm includes asset building, hotel operations, finance, online business, and the healthcare sector.


EVERGRANDE: THE CRISIS

Evergrande has been struggling to raise funds to repay many of its lenders, suppliers, and investors, with regulators warning that its $305 billion debt could pose a serious threat to the country’s financial system if it does not stabilize.


Evergrande, a company that started selling bottled water in 1996 followed by a pig farm, now owns a Chinese football club (Guangzhou Football Club, run by former Real Madrid defender Fabio Cannavaro), and has long been China’s postmaster. It has continued to rise in China’s ever-rising commodity prices – a major factor in China’s economic growth since the epidemic – extending to more than 250 Chinese cities selling dreams of becoming homeowners inland.


Evergrande issued a statement saying, “Company shareholders and other investors should know whether the Group can effectively implement financial reduction measures as outlined in this announcement. Company shareholders and other investors are reminded to exercise caution when working with company security.”


SYSTEMATIC ISSUES AND BREAKDOWN OF EVERGRANDE

“China’s growth is driven by debt and inexpensive projects.” China may run out of housing and debt to meet its GDP targets. If Chinese growth slows, that will be worse in the west in everything from steel mining operations to stock prices in retirement positions.

Most experts think the Chinese authorities will prevent Evergrande from falling into a volatile crisis, which could be another cause of global financial uncertainty. But while Chinese authorities may tell Evergrande lenders to be free to build buildings to avoid uncontrollable trends, doing so could lead to problems one day and be a hindrance to economic growth. To put it another way, China’s days of advertising and much of the world could be over.


CHINA’S DEBT WOES AND REAL ESTATE SITUATION

Evergrande is classified as the world’s most indebted debtor and is backed by health for months. The constant drum of bad news in recent weeks has accelerated what many experts have warned of the inevitable failure.

The biggest problem is over-indebtedness, created by a system in which risky businesses are allowed to borrow for a long time before facing someone who threatens to undermine social stability and hurt investors and competitors in the industry. The situation was allowed to continue until the government launched a campaign to distribute these areas in 2017.

The real estate sector has been particularly prone to inflation over the past 20 years, creating an inflation target for low-income households and the desire to ensure inflation to maintain social stability. Engineers have three years to implement this policy, which could reduce additional developer debt going forward. However, over time, investors, lenders, employees, and homebuyers will face some difficulties.


KEY DEVELOPMENTS

  • August 2017: Evergrande promised to cut debt for the first time. It aims to reduce the Net Gearing Rate to 70% by June 2020 from the current 240% by June 2017.

  • November 2018: People’s Bank of China added Evergrande to its list of financial risk-priced financial companies.

  • March 2020: Evergrande has aimed to reduce its debt by 150 billion yuan ($23.3 billion) every three years.

  • August 2020: Chinese regulators have met with 12 housing developers, including Evergrande, to introduce three debt summaries in a driving program called “The Three red lines”.

  • September 2020: The company offers a 30% discount on real estate for one month to drive sales.

  • October 2020: Evergrande raises $ 555 million in reduced shares in Hong Kong.

  • November 2020: Complete Shenzhen listing process. Some strategic investors have agreed not to demand payment. The IPO of Evergrande Property Services Group Ltd. of Hong Kong has raised $ 1.8 billion.

  • January 2021: China Evergrande New Energy Vehicle Group Ltd raises $3.4 billion by attracting six new investors.

  • June 2021: Evergrande says it will sell more than half its 58% stake in Peer China Claxon Group Co Ltd. for $386 million. Fitch left Evergrande on `B` with `B+` in a negative tone. Developers have planned HK$13.6 billion (1.75 billion dollars) to pay bond increases and interest on all other dollar bonds and said there would be no further obligations before next March.

  • July 2021:

  • The court ordered the withholding of 136 million deposits in Evergrande bank held by Evergrande at the request of China Guangfa Bank Co Ltd. Several Hong Kong banks have refused to provide new loans to buyers of two unfinished projects in Evergrande.

  • S&P has cut its corporate debt rating by two notes to B- from B+ in the wrong way. Fitch left Evergrande on “CCC+” from “B”.

  • August 2021:

  • Moody’s downgraded Evergrande’s family of business (CFR) rating by two notches to “Caa1” from “B2”. S&P lowered Evergrande again two notches to “CCC” from “B”.

  • The company states it is in talks to sell certain assets, including its interests in Evergrande New Energy Vehicles and Evergrande Property Services. State media reported that construction work has been suspended on two Evergrande projects in Kunming, one of which is overpaid.

  • China’s central bank and bankers have called on senior executives and issued an unusual warning that Evergrande needs to reduce its credit risk and prioritize stability.

  • Evergrande has warned of bankruptcy and the risks involved if it fails to resume construction, dispose of property and renew loans, as it reports a 29% annual decline in total profit.

  • September 2021:

  • China Chengxin International Credit Rating Co (CCXI) has downgraded Evergrande and its maritime bonds to “AA” from “AAA”, erasing the number of bonds used for repo trading as a result.

  • Moody’s reduced China’s corporate family rating (CFR) to Evergrande to “Ca” from “Caa1 ″”, in a negative light. Fitch demoted Evergrande to “CC” from “CCC +”, marking the “possible” error.

  • Evergrande said it had “resolved” the payment of a coupon on the maritime bond, but the September 23 deadline of $ 83.5 million in a $ 1 bond was passed unless the bond payers were paid or obeyed by the company, even though the 30-days grace period was left for the same.


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