The situation for the highly indebted Chinese real estate company China Evergrande is becoming more and more threatening. The rating agency Fitch downgraded its credit rating for the group and two of its subsidiaries on Wednesday due to the risk of impending payment defaults. “The downgrade reflects our view that a failure of any kind seems likely,” said Fitch experts in explaining the move. "We believe credit risk is high with tight liquidity, declining contract sales, pressures of late payments to suppliers and contractors, and limited progress in selling assets."
The long-term credit rating is now “CC” after previously “CCC +”. In the days before, the rating agencies Moody's and the domestic China Chengxin International (CCXI) had also lowered their rating. About a week ago, the country's second largest real estate developer himself warned of liquidity and default risks if he should not be able to resume construction, sell holdings and renew loans.
Unrest is growing in the financial markets. The price of the Hong Kong-listed Evergrande shares temporarily fell to a six-year low on Wednesday, but then closed more than 4 percent up. Since the beginning of the month, however, the price has fallen by 15 percent, the minus since the beginning of the year is more than 76 percent. "We expect the company's deleveraging path to be bumpy, which could lead to heavy discounts on its property sales and potential asset disposals," Goldman Sachs analysts said in a recent study.
In the bond markets, the price of a bond from the company that runs until May 2023 and bears 5.9 percent interest fell by another 2.8 percent after a drop of more than 50 percent since last week. The yields on dollar bonds with coupons of 12 percent as a rule are in some cases far more than 100 percent. The bond prices of other Chinese real estate groups also fell significantly. At times, the Chinese stock exchange suspended trading due to the turbulence in prices. While no bonds will mature this year, Fitch estimates the company will have to make interest payments on bonds of $ 129 million in September alone and $ 850 million before the end of the year. In June, Evergrande defaulted on interest payments, which accelerated the slump in securities prices on the stock exchanges.Allegedly, Evergrande now wants to suspend interest payments on loans from two banks that are due in a few days. The group is the most heavily indebted property developer in the world.
The company is also struggling with due payments to suppliers. According to stock market records, Evergrande had an outstanding debt of 562 million yuan to its supplier Skshu Paint at the end of August. According to his own statements, the latter is now content with taking over three unfinished Evergrande projects. In China, financing via switching suppliers, known as commercial bills, is quite common, not least because they are technically not classified as debt. These have become an important funding instrument for Evergrande. Trade and other payables rose 15 percent from December to a record 951 billion yuan ($ 147 billion), accounting for nearly half of total debt.This is in sharp contrast to the company's reported debt, which has fallen to a five-year low of 572 billion yuan.
Fear of domino effect
Evergrande had announced in the half-yearly annual report that some liabilities for the construction development were overdue, which led to the suspension of work on some projects.
Investors fear shock waves for the Chinese banking system if Evergrande collapses.
“Its huge balance sheet will have a real ripple effect on China,” Nomura economist Lu Ting said some time ago.
"When financial institutions lose money, they will cut back on lending to other companies and sectors."
Little is known from the Chinese authorities regarding the existence of any plans for dealing with the company.
So far, they had stopped pushing Evergrande to eliminate its debt risks.
Evergrande founder Hui Ka Yan has built his empire over the course of more than two decades with high credit and the greedy, not always legal, appropriation of building land. The group weathered a debt crisis last year with the help of wealthy friends and the government. But since the authorities tightened the regulation, the group has been in trouble again.