On the 21st October 2021, one day before their 30-day grace period from a missed payment deadline ended, Chinese construction firm the Evergrande Group paid 83.5 million USD to debt trustee Citibank. With over 300 billion USD in debt, they are struggling to pay its suppliers and creditors. The 83.5 million USD payment was earmarked for foreign investors, whose liabilities the Chinese government insisted be honoured. Another payment was made on the 29th October 2021, on the day of another expiration date. The firm faces 390 million USD in further coupon payments before the end of 2021. With new home sales in China falling by 25%, the struggles of the Evergrande Group exemplify the slump that has recently hit the previously booming Chinese real estate market, a slump which has caused problems in the heavily indebted industry.
Uncertainty surrounds the surprise payment, which was made without the release of a formal statement and without indication of its source. Rather than a satiation, the last-minute transfer is seen as a stop gap measure. Reuters reports Kobre and Kim partner John Han as saying, “While obviously a positive, the coupon payment does not address the overall concerns about Evergrande’s sustained liquidity through the first maturity in Q2 2022 and beyond.” In the week following the payment, Fitch Ratings Inc. downgraded Evergrande again, saying default was “probable”. Evergrande bonds are selling at 30 cents on the dollar, suggesting markets do not rate the firm’s recovery prospects highly. Share prices, despite rising in the immediate aftermath, were at 2.32 HKD on the 29th October 2021 – a fall of 10% since the 21st and a fall of over 80% since January. Investors who may lose out in a default include Allianz, Ashmore and BlackRock, as it is ambiguous how much claim they have to remaining real estate projects if the company defaults.
Reputationally mired by this crisis, Evergrande has aimed to raise confidence in its long-term potential. On 22nd October 2021, Evergrande announced a shift over the next 10 years to its fledgeling electric vehicle arm, which hopes to produce 1 million vehicles in 2025. Moreover, it has posted time and date stamped images on Chinese social network Wechat of work resuming at 9 construction sites, representing Evergrande’s intention to reassure homeowners and shareholders of business as usual, despite hundreds of its 1300 sites still being closed due to unpaid suppliers and staff. In the event of an official default, experts predict that the Chinese government will likely take over construction at most sites, ensuring that homebuyers do not lose out. Analysts suggest that intervention by the state could occur to prevent Evergrande defaulting, a move which would raise the cost of borrowing to other Chinese construction firms. However, the future is uncertain – while Chinese state intervention in struggling firms may have previously been the norm, this assumption may not continue to hold, as the country enters a more market-oriented era.
Questions remain as to why Evergrande chose to pay bondholders, rather than default and enter talks to restructure its debts to be more manageable. One theory suggests Evergrande is buying time, as it tries to sell assets offshore to pay creditors onshore. Asset sales have been a crucial part of Evergrande’s strategy out of the crisis, but recent reception has been cold, and a large 2.6 billion USD sale failed a few days before the first payment.
The Chinese government has stated responsibility for the liquidity crisis lies with Evergrande and the effects of the crisis are containable. In the wake of the Evergrande crisis the industry has seen a sweep of defaults, downgrades, and bond slumps, such as the default of developers Modern Land, Fantasia, and Sinic Holdings from missed USD debts. The current situation is partly an effect of the government’s “Three Red Lines policy”, which severely restricted the heavily leveraged construction industry’s ability to borrow, aiming to reduce the sector’s debt. China looks posed attempt to mitigate the impacts of the Evergrande crisis to the wider economy. For example, Yi Gang, the People’s Bank of China governor, said the bank is watching the condition of developers and at-risk banks “so they do not become a systematic risk,” and is providing capital to small and mid-size banks.
Evergrande, like many other Chinese businesses, is relatively untransparent surrounding its future strategies. While the firm diversifies into electric vehicles, foreign investors and analysts are pessimistic, still expecting the firm to imminently collapse. Despite sourcing the credit to meet two late payment deadlines and narrowly avoid defaulting, their actions still leave an uncertain and precarious Chinese construction market. With more debts due to be called up in the coming weeks and months, the actions of the firm’s management and Chinese government will determine their long-term prospects.
By: James Miller
Sector Head: Charlotte Snell