Analysis: China's house of cards: Evergrande threatens wider real estate market

Xinyuan Real Estate Co

15/09/2021 03:00

(Repeats item first carried late on Tuesday)
    By Tom Westbrook and Andrew Galbraith
    SINGAPORE/SHANGHAI, Sept 14 (Reuters) - China Evergrande is
teetering between a messy meltdown with far-reaching impacts, a
managed collapse or the less likely prospect of a bailout by
Beijing for what was once the country's top-selling property
developer.
    Founded in Guangzhou in 1996, Evergrande has epitomised
China's freewheeling era of borrowing and building, but with
liabilities of nearly two trillion yuan ($305 billion) its
possible collapse looms as one of China's largest for years.
    Debt and land-buying curbs and hundreds of new rules have
been imposed on Chinese developers over recent years as part of
a push to cut financial risks and promote affordable housing.
    Evergrande  3333.HK , which accelerated efforts to cut its
debts in 2020 after regulators introduced caps, does not have
any major offshore bond maturities until early next year but
tardy payment of suppliers and interest on loans have brought to
a head concerns that have long nagged at investors.
    Now, without access to fresh funding, Evergrande cannot pay
suppliers, finish projects or raise income, prompting it to hire
advisors and warn of default risk. This, along with a buyout,
break-up or bailout are the scenarios now being evaluated.
 urn:newsml:reuters.com:*:nL1N2QG00P
    And while analysts have played down comparisons to the 2008
collapse of U.S. investment bank Lehman Brothers, which caused
crises at counterparties and ultimately seized up global
markets, some investors have similar contagion concerns.
    "If as expected Evergrande is defaulting on its debt and
goes through a restructuring, I don't see why it would be
contained," Michel Lowy of banking and asset management firm SC
Lowy, which focuses on distressed and high-yield debt, said.
    "There are other developers that are suffering from the same
problem of no access to liquidity and have extended themselves
too much," Lowy added.
    Other worries include the exposure of banks and the
determination of regulators to press on with property market
reforms despite hints of damaging consequences.  urn:newsml:reuters.com:*:nL4N2PV36C
    Reaction has so far concentrated in the bond market and on
Evergrande's stock, as well as the stocks and bonds of other
developers such as, among others, Guangzhou R&F Properties Co
 2777.HK  and Xinyuan Real Estate Co  XIN.N . .HK 
    Evergrande shares are down about 90% in 14 months, while its
dollar bonds are trading at 60-70% below par.
    "Stress is mounting for the most obvious grey rhino in
China, namely the real estate sector," Natixis economist Alicia
Garcia Herrero said.
    
    FIRE SALE 
    The most immediate concern is of a real estate crash rather
than a Lehman-style financial crisis. An Evergrande fire sale
could crush prices, causing leveraged developers to blow up and
crippling a sector comprising a quarter of China's economy. 
    "Lehman (was) very different as it went across the financial
system, freezing activity," said Patrick Perret-Green, an
independent London-based analyst.
    "Millions of contracts with multiple counterparties,
everyone was trying to work out their exposure," he said. "With
Evergrande it depresses the entire real estate sector."    
    Bank exposure is also wide and a leaked 2020 document,
written off as a fabrication by Evergrande but taken seriously
by analysts, showed liabilities extending to more than 128 banks
and over 121 non-banking institutions.
    But data suggests non-performing loans at commercial banks
were a manageable 1.76% last quarter, and compared to the United
States, China has far greater control over its financial system.
    A drive by authorities to cut developers' debts is also seen
as increasing the likelihood of a property liquidation.
    "The government has worked tirelessly to drive de-leveraging
in the bloated real estate sector, so throwing a lifeline to
Evergrande now is unlikely," said James Shi, distressed debt
analyst at credit analytics provider Reorg.        
    Analysts are increasingly expecting a managed collapse that
seeks to protect smaller investors, with around a hundred
angrily showing up to Evergrande's headquarters on Tuesday,
while bondholders take a haircut.    
    "We do not believe the government has an incentive to bail
out Evergrande (which is a private-owned enterprise)," Nomura
analyst Iris Chen said in a note to clients.
    "But they will also not actively push Evergrande down and
will supervise a more orderly default, if any, in our view."
    If Evergrande is to recoup anything, it must first find
buyers for its assets, which it has been struggling to do as
potential saviours seem content to wait for more distress.
    In a stock exchange announcement on Tuesday, Evergrande said
it had not been able to complete the disposal of its office
building in Hong Kong "within the expected timetable".
    "The ongoing negative media reports concerning the group
have dampened the confidence of potential property purchasers,"
Evergrande added.

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TAKE A LOOK-China Evergrande warns of default risks   
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Embattled Evergrande warns of growing default risks as pressures
mount     urn:newsml:reuters.com:*:nL1N2QG00P
Evergrande to speed up asset sales as hopes swirl about gov't
lifeline     urn:newsml:reuters.com:*:nL4N2PU2HD
China's property crackdown stalks credit markets     urn:newsml:reuters.com:*:nL4N2PV36C
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 (Reporting by Tom Westbrook in Singapore and Andrew Galbraith
in Shanghai; Additional reporting by Vidya Ranganathan in
Singapore and Samuel Shen in Shanghai; Editing by Alexander
Smith)
 ((tom.westbrook@tr.com; +65 6973 8284;))