The world’s most in­debted de­vel­oper, China Ever­grande, faces a cri­sis of con­fi­dence.

Cred­i­tors are wor­ried about a cash crunch af­ter the firm sent a let­ter to Chi­nese of­fi­cials

Bangkok Post - - BUSINESS -

China Ever­grande Group is fac­ing a cri­sis of con­fi­dence among cred­i­tors who’ve lent the world’s most in­debted de­vel­oper more than $120 bil­lion.

Long-sim­mer­ing doubts about the prop­erty gi­ant’s fi­nan­cial health ex­ploded to the fore on Thurs­day, fol­low­ing re­ports it had sent a let­ter to Chi­nese of­fi­cials warn­ing of a po­ten­tial cash crunch that could pose sys­temic risks. The news sparked a bond­holder ex­o­dus that con­tin­ued into Fri­day, send­ing the price of Ever­grande’s yuan note due 2023 down as much as 28% to a record low. Losses in the com­pany’s dol­lar bonds spread to high-yield debt across Asia.

Ever­grande said in a state­ment that ru­mors and doc­u­ments cir­cu­lat­ing on­line were “fab­ri­cated” and “pure defama­tion,” with­out com­ment­ing di­rectly on whether it had warned of­fi­cials of a po­ten­tial cash crunch. The de­vel­oper, con­trolled by bil­lion­aire Hui Ka Yan, said it gen­er­ated 400 bil­lion yuan from project sales in the first eight months and main­tains healthy op­er­a­tions. Ever­grande won ap­proval from Hong Kong’s stock ex­change to spin off its prop­erty man­age­ment unit, a per­son fa­mil­iar with the mat­ter said on Fri­day, paving the way for it to raise much-needed cap­i­tal.

That did lit­tle to buoy in­vestor sen­ti­ment, how­ever, with Ever­grande shares fall­ing 9.5% to the low­est level since May at the close of trad­ing in Hong Kong.

The mar­ket’s big­gest near-term worry re­lates to an agree­ment Ever­grande struck with some of its largest in­vestors. It gives them the right to de­mand their money back if the com­pany fails to win ap­proval for a back­door list­ing on the Shen­zhen stock ex­change by Jan. 31. The re­pay­ment could amount to 130 bil­lion yuan ($19 bil­lion), or about 92% of Ever­grande’s cash and cash equiv­a­lents. At least one of the in­vestors has sig­nalled it would be un­will­ing to ex­tend the dead­line.

In an­other sign of mount­ing con­cern among cred­i­tors, at least five Chi­nese banks and two trust firms held emer­gency meet­ings on Thurs­day night to dis­cuss their Ever­grande ex­po­sure and ac­cess to col­lat­eral, peo­ple fa­mil­iar with the mat­ter said. Among them was China Min­sheng Bank­ing Corp., whose ex­po­sure to Ever­grande ex­ceeds 29 bil­lion yuan, one of the peo­ple said.

At least two of the banks that con­vened meet­ings on Ever­grande de­cided to bar the com­pany from draw­ing un­used credit lines, ac­cord­ing to peo­ple fa­mil­iar. The de­vel­oper had credit lines of 503 bil­lion yuan as of June 30, of which 302 bil­lion yuan were un­used.

Min­sheng Bank de­clined to com­ment. The lender’s shares dropped 1.4% in Hong Kong to the low­est level since 2012.

“Re­gard­less of the au­then­tic­ity of the let­ter, we think the sit­u­a­tion may have pro­longed neg­a­tive im­pact,” Man­jesh Verma and Stella Li, credit an­a­lysts at Cit­i­group Inc., wrote in a re­port. “It in­creases con­cerns among var­i­ous in­vestors and lenders and hence in­creases dif­fi­culty in fund­ing ac­cess and re­fi­nanc­ing.”

Ever­grande has long been viewed as a poster child for highly lever­aged com­pa­nies in China, where cor­po­rate debt swelled to a record 205% of gross do­mes­tic prod­uct in 2019 and has likely climbed fur­ther this year as firms in­creased bor­row­ing to tide them­selves over dur­ing the pan­demic. Ever­grande has tapped banks, shadow lenders and the bond mar­ket in re­cent years to ex­pand be­yond the prop­erty in­dus­try into busi­nesses rang­ing from elec­tric cars to hos­pi­tals and theme parks — ar­eas that of­ten align with Chi­nese Pres­i­dent Xi Jin­ping’s pol­icy pri­or­i­ties.

Though it’s un­clear why Ever­grande has yet to win ap­proval for its list­ing plan, some an­a­lysts have spec­u­lated it may re­late to China’s ef­forts to tame sky­high home prices and re­strain fundrais­ing by de­vel­op­ers. Reg­u­la­tors have been us­ing a wide range of pol­icy levers since 2016 to de­ter spec­u­la­tive home-buy­ers, curb ex­pen­sive land prices and re­strict lend­ing to res­i­den­tial builders.

Ever­grande has said it won’t raise new funds through the list­ing in Shen­zhen, but the trans­ac­tion could al­low the com­pany to achieve a higher val­u­a­tion and thus eas­ier ac­cess to fu­ture fi­nanc­ing. Its stake sale to strate­gic in­vestors in 2017 im­plied a val­u­a­tion of about 425 bil­lion yuan for the unit, which holds most of Ever­grande’s real es­tate as­sets. That’s al­most three times higher than the mar­ket value sug­gested by the de­vel­oper’s ex­ist­ing shares in Hong Kong. Chi­nese prop­erty de­vel­op­ers trade at about 12 times pro­jected earn­ings on av­er­age in Shang­hai and Shen­zhen, com­pared with about 5 times in Hong Kong.

One big unan­swered ques­tion sur­round­ing Ever­grande is whether au­thor­i­ties would step in to sup­port the de­vel­oper if it strug­gles to re­pay cred­i­tors. While the Chi­nese govern­ment has a long history of bail­ing out sys­tem­i­cally im­por­tant com­pa­nies to main­tain fi­nan­cial sta­bil­ity, pol­icy mak­ers have in re­cent years sought to in­stil more mar­ket dis­ci­pline and re­duce moral haz­ard.

As part of ef­forts to rein in fi­nan­cial risk, au­thor­i­ties have taken con­trol of in­debted con­glom­er­ates in­clud­ing HNA Group Co., An­bang In­sur­ance Group Co. and To­mor­row Group. They’ve also in­tro­duced new rules for fi­nan­cial hold­ing com­pa­nies, in­clud­ing Ever­grande, that im­pose min­i­mum cap­i­tal re­quire­ments and other re­stric­tions meant to re­duce the threat of sys­temic blowups.

S&P Global Inc. cut its out­look on Ever­grande’s B+ credit rat­ing to neg­a­tive from sta­ble on Thurs­day, but down­played the threat of a liquidity crunch. The rat­ings com­pany said Ever­grande is try­ing to con­vince strate­gic in­vestors to stay put and is an “as­set-rich” com­pany with mul­ti­ple fundrais­ing chan­nels.

Ever­grande has vowed to in­crease sales as part of its ef­fort to meet an ag­gres­sive delever­ag­ing tar­get — cut­ting bor­row­ings by about 150 bil­lion yuan each year from 2020 to 2022, or about half its cur­rent debt load.

But so far, the com­pany has fallen short of the pledge. Ever­grande’s to­tal debt rose 4% in the first half to 835 bil­lion yuan, while short-term debt was al­most triple cash, equiv­a­lents and short-term in­vest­ments com­bined, data com­piled by Bloomberg show.

A pedes­trian sig­nal shows a red light with the China Ever­grande Cen­tre in the back­ground in Hong Kong on Fri­day.

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