Friday, July 23, 2021, a banner promoting the Emerald Bay residential project outside the China Evergrande Center in the Wan Chai area of Hong Kong, China.
Lam Yik | Bloomberg | Getty Images
Facing developer China Evergrande said Tuesday that its property sales are likely to continue to fall significantly in September, leading to a deterioration in its cash position.
The firm reiterated that it could default on its debt, repeating a warning it issued two weeks ago. Evergrande has been trying to sell some assets to ease its liquidity, but said those efforts have yet to yield anything.
Evergrande shares fell about 10% in the morning trade. So far this year it has plummeted by about 80%.
Evergrande sales have been steadily declining since June. The Chinese real estate giant said in a presentation on the Hong Kong stock exchange that it expects a “significant” continued decline in sales this month.
This, Evergrande said, would lead to “continued deterioration in cash collection by the Group, which in turn would put enormous pressure on the Group’s cash flow and liquidity.”
“September is usually when real estate companies in China record higher sales under property contracts. However, ongoing negative reports about the group have diminished the confidence of potential buyers of group properties,” the signature on presentation.
Rating agencies have repeatedly downgraded Evergrande since last year as the world’s most indebted real estate developer struggles to stay liquid. The firm’s financial position eroded especially after the Chinese government drafted rules to curb developer loan costs. These measures put a limit on debt in relation to a company’s cash flows, assets, and capital levels.
“Uncertain” whether Evergrande can sell its assets
Units that Evergrande has been trying to sell include the China Evergrande New Energy Vehicle and Evergrande Property Services. But so far it has not signed any agreement with any investors and remains “uncertain” whether the firm will be able to confirm any sale.
He also said he was actively exploring the sale of his Hong Kong office building, Wan Chai’s China Evergrande Center. However, it has not borne fruit either.
Evergrande said it would continue to take steps to alleviate its liquidity problems, including “strict” control of costs, sales promotion and asset disposal.
Evergrande warns of risks of “cross defect”
Evergrande also warned that growing problems could lead to wider delinquency risks.
“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,” warned investors.
He said that if he could not repay his debt, a situation of cross default could occur according to his existing financing agreement and the relevant creditors who demanded payment.
A cross defect means that an activated defect in one situation can be extended to other obligations. This could lead to a wider spread in other sectors.