China's Evergrande: Too big to fail?
Introduction to Evergrande Group
Evergrande was founded in 1966 by businessman Xu jiayin. Evergrande group formerly also known as Hengda Group is the second-largest real estate developer in Guangzhou, Southern China. It has developed more than 1,300 projects in 28 cities and boasts of an employment generation of 123,276 employees.
The company was listed on the Stock Exchange of Hongkong (SEHK) in October 2009 managing to raise $722 million in an initial public offering (IPO).
Evergrande Group's market capitalization is valued at HK$33.79 billion
Apart from this the group also has its presence felt in various other sectors too like: Automobile, Food beverages, Healthcare, Tourism and Recreation, finance, sports.
Speaking of sports, the giant bought a soccer team in 2010 which is currently valued at $282 million, named the Guangzhou Evergrande. Under development by Evergrande is the world’s largest lotus-shaped football stadium that plans to seat 1,00,000 spectators.
What went wrong for Evergrande?
The company started borrowing heavily for an estimated $300 billion. The Liabilities of the company are big and the company has been unable to repay them. This in turn has put the company at the risk of a financial collapse. This could a severe threat to China’s financial system and have significant repercussions around the world.
The Chinese Government came out with new regulations on borrowings for real estate developers in August 2020, which stated how much a real estate developer could borrow as per its financial position which is measured by the three red lines. These rules prevented Evergrande Group from borrowing more funds and in turn, took a toll as they had to sell off their properties and assets at lower prices to generate additional funds. This factor, again further contributed to their insolvency case.
Evergrande had interest payments due to be cleared on Thursday, last week. The company managed to make payment for the same via bond coupons for a total of HK$35.88 million.
Tagged as China’s biggest Real Estate Indebted developer, the company is in the news for all the wrong reasons. To add to this various renowned brokerage companies like Goldman Sachs, Fitch and S&P have downgraded the company’s bonds. The Company’s bond prices have crashed to an 11 year low. Evergrande share prices are currently trading at HK$2.55, a 44.32% drop from its 52 week high.
The Road ahead for Evergrande.
The fall of the Real estate giant, the Evergrande crisis could be fatal for not only its customers and the banks but also the entire supply chain involved (such as construction, design, material suppliers). Whether the Chinese government provides financial aid to Evergrande is yet to be seen as there is no official word on it.
Evergrande has appointed financial advisors for auditing and has warned of potential default risk as there is great pressure on the liquidity and cash flow of the company.
As per Evergrande Group's latest news, as per economists at Morgan Stanely, Beijing may initiate debt restructuring for a property developer in the upcoming weeks. The policy may also be eased.
Similar fate like the Lehman crisis?
Analysts, as well as investors all across are worried that the world’s most indebted developer, the Evergrande group could face a similar fate to what The Lehman brothers faced back in 2008.
To Recall, Lehman Brothers Holdings Inc. was a financial services company that was founded in 1857. It was the fourth largest investment bank with a count of 25,000 employees offering services in equity, trading, research, investment management, fixed-income sales. The company got into mortgage defaults. Some Economists have questioned the Evergrande Group scenario to be like the 'Lehman moment' the reason being the subprime mortgage crises The Lehman brothers faced.
On 15th September 2008, Lehman Brothers filed for bankruptcy with US$600 billion in assets.
The real question is, will Evergrande Group face the same destiny as The Lehman brothers did?