Evergrande: predictability of defaults reduces contagion risk

The likeliest scenario is that shareholders will be wiped out while its lenders absorb big losses

A housing complex developed by Evergrande in Luoyang, China. The group needs to pay interest of just over $100m in onshore and dollar bonds over the next few days © Reuters


This is the long-awaited week of reckoning for the world’s most indebted property developer. 

Interest payment deadlines are looming for China’s Evergrande, whose total liabilities of $306bn amount to about 2 per cent of national gross domestic product. 

The fallout is just beginning. Investors in China are scrambling to avoid contagion.

The group needs to pay interest of just over $100m in onshore and dollar bonds over the next few days. 

Local authorities have reportedly told banks not to expect repayment. 

Some Evergrande dollar bonds are trading below 30 cents on the dollar.

Developers such as Evergrande rely on specialist lenders and trust companies. 

They will be the first to feel the impact of missed payments, which may then be transmitted to banks. 

Industrial & Commercial Bank of China, Agricultural Bank of China and China Minsheng Bank are expected to have the highest exposure.

Evergrande is estimated to have taken loans from more than 120 trust companies. 

These account for about 40 per cent of its borrowings. 

It has $1.7bn worth of trust loans due in the current quarter. 

A slowing mainland property market, with home sales down a fifth in August, could compound problems as the value of assets falls.

Fears of contagion have spread to Hong Kong property developers. 

The city’s real estate market has been booming. 

Home prices rose to a record high in August. 

Unlike indebted mainland developers, Hong Kong peers have healthy balance sheets. 

The debt to equity ratio of Sun Hung Kai, Hong Kong’s largest property developer, stands at below a fifth, compared with 140 per cent for Evergrande.

The problem is that Hong Kong developers have bet big on mainland properties in recent years. 

These assets have offered a high-growth hedge against political risk, weak retail rents and empty hotels in Hong Kong.

Mainland China accounted for nearly a third of Sun Hung Kai’s profits from property sales in the year to June, tripling from the previous year. 

Peer Henderson Land’s pre-tax underlying profit from mainland properties more than doubled last year. 

Shares that once looked attractive for their discount of about 50 per cent to net asset value should now be avoided.

The likeliest scenario is that Evergrande shareholders will be wiped out while its lenders absorb big losses. 

Evergrande has been an over-indebted outlier for years. 

Few defaults have been prophesied as frequently and often.

That should help China to contain contagion.

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