China Evergrande is drowning in debt and in sale talks, but who are they and why does this matter?
Based on current estimates, the company owes over US$300 billion in bad debt, which is debt they probably can’t pay, at least anytime soon.
Who is Evergrande?
- China Evergrande Group is an investment holding company, which basically does everything related to owning and operating real estate property.
- The company is the second-largest property developer in China in sales with around 507 billion yuan (around US$80 billion) of reported revenue in 2020.
- A property developer pretty much just buys land, and it then works with other businesses or people to decide what to do with that property.
- Along with property construction, Evergrande also dabbles in hotel operations, finance business, internet business and health industry business.
- The problem is that the company is holding onto a lot of debt right now, owing more money than it can pay off, and officials in Beijing want it to slow down.
What does Evergrande’s debt look like?
- For the most part, even a little debt can be a serious problem for a lot of people, but Evergrande doesn’t have just “a little” debt.
- Based on current estimates, the company owes over US$300 billion in bad debt, which is debt they probably can’t pay, at least anytime soon.
- “On paper it doesn’t make any sense for a company like this to have so much debt. This is not normal,” said Jennifer James, an investment manager at Janus Henderson Investors to The New York Times.
- The problem isn’t just how much debt the company has, but how the company is looking to manage its debt in order to meet government standards.
How is the company handling this debt?
- So, the company’s stock price has dropped 75% in the past year and people are kind of panicking. The company has started selling off parts of itself to try and save the whole company.
- Evergrande has been struggling for a while, but the company’s leader, Xu Jiayin, seems to have relied on his poker buddies to bail him out of tight situations according to Bloomberg.
- CST Group Ltd., where Yan’s billionaire, poker buddy Zhang Songqiao has a significant stake, said in a filing earlier last month that it had bought US$11 million worth of Evergrande bonds on the open market when the bonds were at their worst value ever.
- Companies will often buy debt and sell the debt off to investors through bonds, which are a company’s way of saying, “We need money, and we will pay you back with some extra once we make more money with your money.” That is, assuming they make money.
- “It’s expected these tycoons will lend their hand to Xu because of their mutual interests,” said Maggie Hu, an assistant professor of finance and real estate at The Chinese University of Hong Kong to Bloomberg. “Whether they can collectively tackle the current crisis without dragging themselves down isn’t known.”
- Zhang’s company, New World Development, responded to this saying that it “conducts transactions only after thorough consideration to serve the best interests of our shareholders and the group.”
How are people reacting?
- Now, the company is going through a restructuring.
- Raymond Cheng, a managing director of financial service provider CGS-CIMB Securities, estimated Evergrande could raise about US$3.2 billion after trimming off the fat by selling off parts of their company.
- “The latest development is positive for Evergrande and also illustrates its determination to deleverage further," he said.
- But, one of the biggest problems that the company is currently facing is that the support of the general Chinese population is relatively low after it pulled out of several residential projects leaving many people without their promised homes.
- “It has a huge impact on my life,” said Wesley Zhang, who purchased an apartment for his parents back in 2017 that still hasn’t been built. “We also need to consider buying another apartment, but the property prices are much higher now.”
What comes next?
- The company has a lot of hurdles to cross as it continues to move forward, and it seems like Beijing isn’t particularly interested in dealing with the situation themselves for the time being.
- With all of the undeveloped properties that Evergrande has left half-finished, there are plenty of lawsuits piling up against the company for bad debt and unkept promises, and Beijing is asking the Guangzhou Intermediate People’s Court to handle everything.
- If the company hopes to receive any bailout funding from the government, they are going to have to do everything in their power to comply with the Chinese government’s standards and expectations.
- There still isn’t 100% certainty whether or not the company can actually survive this overwhelming amount of debt, but, in the meantime, the company is selling off some of its unfinished apartment complexes to be finished by other companies.
- Mr. Zheng, who bought his parents an apartment four years ago, is expecting to be able to have his apartment ready in the next two years after the property was sold to another company to complete.
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