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Evergrande crisis
BusinessCompanies

China Evergrande: from ‘controlled demolition’ to near-certain default and state takeover, money managers outline views on unfolding debt crisis

  • Evergrande has slumped 82 per cent this year, wiping out almost US$20 billion of value, while its offshore bonds tanked to distressed levels
  • Global fund managers see a range of outcomes amid official silence, with most citing the need to prevent social disorder from angry customers

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Founder Hui Ka-yan, seen during a speech in 2017, is trying to save his debt-laden property empire as cash flow dries up. Photo: Handout
Cheryl Heng
As China Evergrande Group fights for survival under more than 1.97 trillion yuan (US$305 billion) of liabilities, speculation is mounting that a painful restructuring is inevitable.
The stock has plunged 82 per cent this year, wiping out some US$20 billion of market value, while its offshore bonds are trading at distressed or near-default levels. None would have suffered more than its 62-year old founder Hui Ka-yan who owns 76 per cent of the company and has bought a large chunk in its own dollar bonds. His staunchest ally Joseph Lau at Chinese Estates Holdings is also nursing steep losses.
Equity holders could be wiped out while bondholders take a haircut, Capital Economics said in a report, echoing market expectations since the indebted developer hired outside financial and restructuring experts to tackle its burden. Evergrande on Wednesday “resolved” payment due on an onshore bond this week as more deadlines approach.

Here’s what some global money managers are saying about the liquidity crunch that has drawn some parallels to the collapse of Lehman Brothers during the 2008 global financial crisis.

Lombard Odier: ‘a controlled demolition’

Restructuring is a foregone conclusion given its well-known fragilities and dependence on unsustainable, short-term financing, Asia macro strategist Homin Lee said in a report on Tuesday. Evergrande’s status as a private enterprise precludes any direct state intervention to fulfil the obligations of stock and bond investors, he added.

“Evergrande’s situation is a ‘controlled demolition’,” Lee added. “The systemic implications are limited. Prices should stabilise once Beijing’s decisions on the troubled property developer become clear.

“The company has been in a category of its own in terms of extremely aggressive financing tactics. Evergrande maximised its loan allowances from banks (even acquiring a small bank for that purpose), used presales as a de facto financing channel, and increased dependence on short-term commercial bills to nearly 30 per cent of its liabilities.

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