Evergrande’s tumultuous week renews fears of liquidity crisis

A brutal 12 months for Evergrande is going from bad to worse as the highly indebted property group’s billionaire chair and its investors contend with financing woes, credit downgrades and a U-turn on an expected payout.

Shares in Evergrande tumbled 12 per cent on Tuesday in Hong Kong after the group, which has almost Rmb2tn ($309bn) of liabilities, announced it would cancel a planned special dividend.

That marked the latest blow for Hui Ka Yan, who was once China’s richest person, thanks to Evergrande’s role in China’s sweeping waves of urbanisation. His personal fortune, which stood at $34bn last July, has taken a substantial hit following a 72 per cent plunge in the developer’s share price over the past year.

Hui would have stood to benefit from Evergrande’s first payout since 2018 given his 70 per cent stake, but its timing had raised eyebrows among investors. Evergrande, one of China’s top property groups, has faced mounting concerns over a potential cash crunch as Beijing seeks to rein in the industry.

Over the past week, a flurry of ominous developments related to Evergrande’s access to financing have wiped billions of dollars off the company’s market value and piled even greater pressure on Hui to navigate relationships with lenders, customers and Beijing.

S&P Global Ratings late on Monday downgraded Evergrande’s credit rating, following similar decisions by Fitch Ratings and Moody’s last month.

“There’s simply not enough cash for Evergrande to repay its upcoming borrowings unless it refinances it or generates enough cash to plug that gap,” said Luther Chai, an analyst at CreditSights, based on the developer’s latest annual report.

As credit conditions tightened in China, scrutiny has fallen on Evergrande’s sales model. As well as borrowing from banks and investors both in China and globally, where it has $6bn in dollar-denominated debt coming due next year, Evergrande has relied heavily on selling properties before it has finished building them to keep cash flowing through the business.

So-called presales, where customers typically borrow through mortgages on top of a deposit to pay for a property, are widespread across China, though rules and requirements vary.

Evergrande shares sold off early last week after a legal notice from authorities in Shaoyang ordered the company to halt presales in the central Chinese city. The city subsequently said the restrictions, which were linked to alleged misuse of funds, would be reversed.

Later in the week, four banks including HSBC ceased providing mortgages for incomplete Evergrande developments in Hong Kong. HSBC declined to comment. The banks are considering reversing the decision, according to Bloomberg News.

In a statement, Evergrande said progress on its Hong Kong projects was “still progressing as planned” and that other banks maintained a positive outlook towards mortgages for uncompleted projects.

“All of those announcements independently aren’t really material but altogether it’s an indication the pressure is really mounting on the group,” said Michel Lowy, chief executive of SC Lowy, a Hong Kong-based investment group. “The likelihood they run out of liquidity in the next few months as a result of that is increasing.”

Line chart of HK$ per share showing Evergrande’s share price has been crushed over the past year

Andrew Lawrence, Asia property analyst at TS Lombard, said the presales model was “typically unstable”.

“As presales fall, the developer is forced to borrow more, banks ask for more pledged assets and higher guarantees, suppliers ask for earlier payment and presales get worse as the developer cuts prices and end users don’t trust the company to complete the development,” he added.

Hundreds of complaints from frustrated homebuyers about delayed projects appeared on Weibo, the popular Chinese microblogging platform.

One homebuyer in the south-western city of Chengdu said he had paid Rmb1.1m in 2019 for an unfinished Evergrande apartment, but the project had been pushed back and was unlikely to be completed by its due date next July.

“That would be a big blow to my family as we have emptied our savings to make the Rmb300,000 down payment and are under pressure to pay mortgages and rents at the same time,” he added. “I bought the apartment because of Evergrande’s reputation as a Fortune 500 company.”

Evergrande did not respond to a request for comment.

Evergrande’s banking relationships have also come under pressure, raising fears for its ability to refinance. A court in Jiangsu province this month froze Rmb132m of Evergrande deposits at the request of Guangfa Bank as part of a dispute over early repayment terms, triggering a stock sell-off after the order circulated among traders. Evergrande released a statement saying it would sue Guangfa, though it later said the spat had been resolved.

Evergrande said at the end of March that its interest-bearing debt had fallen to Rmb674bn, 23 per cent lower than a year earlier. The government’s “three red lines” policy requires developers to reduce their borrowings based on certain balance sheet metrics.

One outlet for raising cash could be the exotic array of assets that Evergrande has built up. These include a bottled water company, a stake in an electric vehicle maker that is worth more than Ford and even a pig farming venture.

“I believe there is a decent chance that in the next few months, they sell non-core assets, they find themselves a partner, they sell some equity, they raise some money, they deliver,” said Lowy. But, he added, the situation was ultimately “binary” because it came down to how the central government viewed the prospect of a restructuring.

S&P said on Monday that Evergrande was “still an asset-rich company” but cited the risk of it losing further access to funding. It also noted the company had slashed prices on contracted sales to an average of Rmb8,100 per sq m, compared with a peak of more than Rmb10,000.

“The entity has little room to keep cutting prices if it wants to stay profitable,” the rating agency said.

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