China Evergrande Group is deep in the red, worth $ 300 billion. And there is growing concern that defaulting on its debt could wreak havoc on China’s real estate market and generate shockwaves through the world’s second-largest economy.
A calculation came even closer Wednesday after Bloomberg News, citing people familiar with the matter, reported that the real estate developer may not be able to pay the interest on some of its $ 300 billion liabilities next week and also a principal payment could be missed. in at least one of his loans.
This is the latest development in the saga of real estate giants, which is being closely monitored in China and around the world.
Evergrande is currently the most indebted real estate developer in the world. The central question is whether the Chinese authorities plan to allow Evergrande’s creditors to suffer heavy losses or whether the country’s communist government, which provides stability and control, will intervene in some way to prevent disorderly default and the detrimental effects it can have. provoke.
Here’s what you need to know about Evergrande and the impact its current financial situation could have on China and the world economy.
Start at the beginning. How long has Evergrande been in business?
Evergrande was founded in 1996 in the Chinese province of Guangzhou by Hui Ka Yan.
Today he graduated from college in 1982 and worked in a steel mill before founding Evergrande, according to Forbes, which lists his current net worth at $ 11.4 billion, making him the 53rd richest person in the list of Billionaires 2021 and in the 10th richest of its list of rich in China. 2020.
He is currently 62 years old, the president of Evergrande.
Hui Ka Yan is the founder and chairman of the Chinese group Evergrande [File: Paul Yeung/Bloomberg]How many projects does the firm currently have?
Evergrande currently has 1,300 real estate projects in 280 cities in China, according to its website.
It has also expanded into other industries, including electric vehicle production, property management, film and television, theme park construction, life insurance, a hospital, a football club, and the production of ‘baby food, mineral water and formulas.
Wow. And how big are these other efforts?
According to the firm’s website, the company’s real estate management division, Evergrande Property Services, has approximately 2,800 projects in 310 cities in China covering a total contract area of more than 680 million square meters.
And its New Energy Evergrande vehicle has set the ambitious goal of developing 14 models of electric vehicles ranging from sedans to sport utility vehicles and producing and selling five million of them in 2025 and five million in 2035.
The firm’s media company, Hengten Networks, includes a streaming platform known as Pumpkin Film that said it had 20.1 million paid subscribers in late May and a film and television producer called Ruyi Film.
Evergrande also has a sports team, Guangzhou Evergrande FC, which is one of the best-known football clubs in China. But it’s not about making money – the firm loses between $ 155 million and $ 310 million annually in its football-related activities, Bloomberg Intelligence analysts Dan Wang and Daniel Fan wrote in a recent report.
I have it. So how many problems does Evergrande have?
According to the company’s liabilities, about $ 300 billion, and Evergrande’s inability to make timely payments on interest and principal on its loans worries investors inside and outside China.
It has also sparked protests among home buyers, investors and even members of the firm’s staff who have come out of Evergrande’s offices to demand that company officials meet with them.
Police officers and security guards are in front of the barricaded entrance to the headquarters of the Chinese group Evergrande in Shenzhen, China, on September 14, as the firm faces growing protests from home buyers, retail investors and even of its own employees, increasing the involvement of the Beijing authorities as it tries to prevent the real estate giant’s debt crisis from provoking social concerns [File: Bloomberg]Yikes. What does Evergrande say?
It looks like things are set to go from bad to worse.
In a statement (PDF) on Tuesday, company officials said they expect contract sales to continue to decline this month, “leading to continued deterioration in cash collection by the Group, which in turn would put enormous pressure on the Group ‘s cash flow and liquidity “.
What has Evergrande done to try to avoid the crisis?
The firm has hired financial advisors Houlihan Lokey and Admiralty Harbor Capital to help “assess the group’s capital structure, assess the group’s liquidity and explore all feasible solutions to facilitate the current liquidity issue and come up with an optimal solution. for all stakeholders as soon as possible, “the board said in a statement Tuesday.
But so far other measures to raise money have failed. Evergrande said the sale of its huge 18,580-square-meter office tower in Hong Kong, the China Evergrande Center, “has not been completed on schedule.”
And so far it has been unable to sell some of its interests in its electric vehicle and real estate management weapons, Evergrande New Energy Vehicle Group Limited and Evergrande Property Services Group Limited.
How do investors react?
Nervously. Evergrande shares have fallen 81% since the beginning of the year and their dollar bonds have fallen to record lows.
Moody’s investor service downgraded Evergrande and its subsidiaries on Sept. 7, citing a negative outlook. Fitch Ratings made the same move, downgrading the company’s rating and writing that it believes it “is likely to be some kind of default.”
What will happen then?
That is the billion dollar question. Evergrande has about $ 84 billion in interest on dollar-denominated bonds maturing on Sept. 23, according to Bloomberg News.
But the firm’s board of directors seems to be prepared for the worst.
“Given the difficulties, challenges and uncertainties in improving its liquidity as mentioned above, there is no guarantee that the Group will be able to meet its financial obligations under the financing documents and other relevant contracts,” the council said in a statement Tuesday.
“If the Group is unable to meet its obligation to guarantee or repay any debt when it is paid or agreed with the relevant creditors on the extensions of these debts or alternative agreements, it may lead to a cross default under the Group’s existing financing agreements. and relevant creditors demanding accelerated amortization, ”they added.
And what about the Chinese government?
All eyes are also on the Chinese government to see if it will intervene and help Evergrande out of the crisis. Guangdong authorities have already rejected at least one bailout request from the firm’s founder, Bloomberg News reports.
But allowing Evergrande to fail could have serious effects across China, causing both financial unrest and civil unrest, two things that President Xi Jinping and his risk-averse government are keen to avoid.