The Emerald Bay residential project developed by China Evergrande in Tuen Mun District of the New Territories in Hong Kong, China, on Friday, July 23, 2021.
Lam Yik | Bloomberg | Getty Images
China Evergrande has committed “two cardinal sins” that have led to the debt crisis it now faces and investors are “definitely sweating,” according to a portfolio manager.
The first “sin” is that the moneyless real estate giant has lent too much money, according to Matthews Asia’s head of fixed income Teresa Kong. Evergrande, the world’s most indebted real estate developer, has more than $ 300 billion in liabilities.
The second is that the company has “questionable corporate governance.”
“So when you have the two of you together, it’s like having a very dry forest and the flower lighting up,” said Kong, who is also a portfolio manager.
Problems at Evergrande have increased in recent weeks.
The company warned investors twice in so many weeks that it could breach its obligation. On Tuesday, Evergrande said he runs the risk of cross-default, which means those risks could spill over into other related sectors.
Evergrande said Tuesday that its property sales would continue to deteriorate significantly this month, adding to the serious cash flow problems.
The firm has been struggling to raise money by trying to sell several assets, but these have yet to generate any sales, it said Tuesday.
Contagion effects?
Evergrande is China’s second largest real estate company by sales.
Analysts have been monitoring the possibility of a wider spread in the real estate sector and greater systemic financial risks in China.
Kong warned that there is “a lot of influence” in the system. “That’s why … it’s really important to make sure that liquidity continues to exist and that there is confidence,” he told CNBC’s “Squawk Box Asia” on Wednesday.
“Last but not least, it is surely to ensure that there is no more social unrest, as Evergrande has a very deep scope.”
According to the company’s website, Evergrande has more than 1,300 real estate projects in more than 280 cities in China. In recent days, protests from angry home buyers and investors have erupted in several cities in China, Reuters reported.
“So they have ended up with their ability to deliver properties and if that is truncated, we could see some more problems,” Kong added.
Foreign investors are probably the last priority
Kong is a foreign investor who has Evergrande bonds “definitely sweating.”
According to the portfolio manager, the government is clear on its goal of maintaining social stability and that means putting home buyers first.
“The first thing you want to do is provide … enough confidence … provide liquidity, so that they can deliver those houses to those people who make the down payments,” Kong said.
Popular investors will likely be the second priority, he said, referring to less experienced retail investors.
“While foreign investors, you see, are institutional investors who should really understand these risks. So I think a lot of those investors should look at some kind of modification and expansion, that is, they should cut- be the main hair or, see your coupon is paid much later, ”Kong said. A coupon is an annual interest paid on a bond.
Evergrande has six bonds maturing next year and 10 in 2023, out of a total of 24 bonds it has issued, according to data from Refinitiv Eikon. Its bonds are also included in various Asian high-yield indices.
Evergrande shares have fallen nearly 80% this year and their bonds have also fallen.