business, companies, china evergrande group, dealing with debt, hong kong stock market, china stock market, china evergrande: from ‘controlled demolition’ to near-certain default and state takeover, money managers outline views on unfolding debt crisis

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 and majority owner Hui Ka-yan and his staunchest ally Joseph Lau at Chinese Estates Holdings.

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.

“Evergrande’s outlier status also matters for our assessment of contagion risk, as the magnitude of the problem is not as severe for other property developers that are frequently grouped with the troubled firm.

“We are confident that the government’s post-default intervention will be effective, because the alternative is a scenario of millions of angry homebuyers. Any failure to deliver the promised new homes to these investors could spark a politically destabilising event.”

The Geneva-based Swiss private bank manages about US$68 billion of assets.

business, companies, china evergrande group, dealing with debt, hong kong stock market, china stock market, china evergrande: from ‘controlled demolition’ to near-certain default and state takeover, money managers outline views on unfolding debt crisis

Founder and chairman Hui Ka-yan seen at the Tiananmen Gate during the 70th anniversary of the founding of China. Photo: Handout

Schroders: state facilitation to prevent spillover effects

Some form of “government facilitation” can be expected to maintain order during a debt restructuring or potential default, managers at the UK-based fund manager said in a September 22 report.

Evergrande sold more than US$100 billion worth of properties in a year. Its default could drag down many of its business counterparts in the supply chain and elevate bad loan ratios while a delay in home delivery could have social implications as well, it added.

“This default has been widely predicted and we believe will have been at least partly anticipated by the Chinese authorities. We therefore believe that government intervention to prevent a disorderly collapse is very likely.

“We expect the government to divide Evergrande’s projects and ask state-owned enterprises or quasi-SOEs to take over. This is already happening, for example, in Shenzhen. Banks may have to take impairments against their loans but, in the long run, losses should be limited as loans should mostly be collateralised. Finally, provincial authorities will also likely support Evergrande’s contractors and suppliers.”

Schroders, which manages about US$967 billion of assets globally, holds an unfavourable view on the Chinese property sector due to high regulations with tightening policies. Efforts to deleverage the industry could also strain liquidity in the industry, it said.

Neuberger Berman: little doubt on default

There is little doubt that Evergrade will default on its debt, despite its efforts to stay within the “three red lines” rules, Rob Drijkoningen, co-head of emerging markets debt said in a note published on Tuesday. Bondholders and bank creditors will face a long restructuring process with uncertain recovery prospects, he added.

“We think authorities will be quicker to act to protect homebuyers, SME suppliers and employment so as to ensure social stability. This is a unique characteristic of China seen in many recent default cases.

“We do not expect a reversal of policy that will allow developers to re-lever, but we expect measures to stabilise property sales and to ease working capital funding so that properties under construction can be delivered to homebuyers.”

Authorities might consider measures like easing mortgage disbursements, easing working capital credit to developers and getting SOE developers to take over Evergrande projects, he added.

Neuberger Berman manages about US$402 billion of assets globally.

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