China's Evergrande Real Estate Group, the world's largest indebted real estate developer, said on Wednesday that it had reached an agreement with a creditor to avoid defaulting on its loans by 2025.
Evergrande - which has debts with a total value of 302 billion dollars, according to a disclosure to the Hong Kong Stock Exchange - stated that one of its branches agreed with creditors on a debt repayment mechanism due in 2025, which avoids defaulting on it.
While the value of the debts that were agreed upon on the mechanism of repayment was not mentioned, the group is facing one of its most difficult periods, with announcing a week ago that it was unable to pay the payments due on it, due to its lack of liquidity.
According to Bloomberg Agency, on Wednesday, the group will repay 232 million yuan (35.5 million dollars) of debt maturing tomorrow.
Effects on global financial markets
The announcement of the Chinese group, its inability to pay, had negative repercussions on the global financial markets, which recorded varying declines during this week's trading, pending the knowledge of the fate of the debts.
Fears of an imminent collapse of the group caused the Evergrande share price to fluctuate sharply again on Tuesday.
According to its data in the stock exchange, the market value of Evergrande at the end of 2020 amounted to about 320 billion dollars, but it recorded sharp declines as of this month, to stabilize its market value below 4 billion dollars, according to what Anadolu Agency reported.
Are we facing signs of a new crisis?
The government is still unable to take a decision to rescue the group - the second largest private real estate company in China - which could threaten its collapse and recall the crisis of the collapse of the Wall Street giant Lehman Brothers during the 2008 global financial crisis.
Evergrande employs 200,000 people and has a presence in more than 280 cities, and reports that it creates 3.8 million Chinese jobs indirectly, according to an AFP report.
Although the bulk of Evergrande's business is in real estate development, it has made massive acquisitions for more than a decade.
It bought Guangzhou Football Club and turned it into a hugely successful club, founded the iconic Evergrande Spring mineral water brand, and opened theme parks that boasted being "bigger" than Disney parks.
It also has an electric vehicle unit as well as investments in tourism, digital operations, insurance and health.
The Evergrande Group has debts worth 302 billion dollars, according to the Hong Kong Stock Exchange (Reuters)
what's the problem?
Evergrande has paid those spending bills with founder Hui Kan Yan borrowing so much that she now owes more than $300 billion - or 2% of China's GDP - and has trouble paying them back.
The problem of the accumulation of debts came to light last year when the government, as part of a campaign to address the worrying huge debts accumulated by real estate companies, began to unveil a series of measures aimed at controlling their borrowing.
This severely limited Evergrande's ability to finish building real estate and sell it to pay off its debts.
Banks have dropped their expectation that the group will repay its loans.
What will happen?
All eyes are on the government.
The real estate sector is an important driver of the Chinese economy, estimated to account for about a quarter of GDP and has played a major role in the recovery after the epidemic.
And any bankruptcy of such large companies will have significant repercussions, according to a report by Agence France-Presse.
However, because it is a private company, Beijing may feel that it is not obligated to prevent the fall of the Evergrande, and may force it to file for bankruptcy and use it to warn that no company is immune to failure and that it cannot rely on the state to bail it out.
But most experts agree that the country will not want Chinese homeowners to lose their savings.
“The best case scenario is that the authorities find a way to prevent Evergrande from declaring bankruptcy, and give the company’s creditors a glimmer of hope that they will avoid catastrophe by at least something, and avoid what could cause further social unrest,” says Larry Ong of the SinoInsider research office.
Then there is the possibility of restructuring with local authorities taking control of parts of the Evergrande, while the investment divisions of the group are allowed to cease operations.
But like this would be a huge task.
“I think it's probably going to be a quiet bailout, because they also don't want to say outright: 'We're here to pump a billion to bail you out,'" says Calvin Wong of CMC Markets. They say, 'Go ahead, carry on with your business as usual in real estate development, and we will save you at the end of it.'
It is worth noting that the group hired experts, including Houlihan Lockey, who advised on the restructuring of Lehman Brothers after its collapse in September 2008.
Are you exposed to the fate of "Lehman"?
The AFP report on whether the Evergrande is at risk of the fate of Lehman Brothers says "it seems... not so".
Lehman Brothers was a Wall Street giant, and one of the Big Five investment banks.
However, the US authorities have allowed it to sink due to heavy losses associated with subprime mortgages.
A banking crisis ensued, markets were hit hard, millions of jobs were lost and many lives destroyed.
But analysts say conditions are different here.
“I don't think it will get that far, because I don't see any kind of stock product being carried onto the Evergrande ledgers themselves,” says Kelvin Wong. “So what we can see now is the effect of the negative feedback loop, which is a psychological effect that is actually transmitted to the rest of the world."
For its part, rating agency Standard & Poor's (S&P) says - in a report this week - that Chinese officials are likely to intervene, but only if they see that the crisis may cause widespread risks.
"We believe that Beijing will only have to intervene if there is a far-reaching contagion that causes many major developers to fail and poses risks to the economic system. Failure of the Evergrande alone will not lead to such a scenario."
Group Chairman's message of optimism
Xu Jian, head of the ever-threatened Evergrande Group, told his workers, in a letter, that he was convinced it was possible to overcome "the darkest moments".
And he sent his message, which was circulated by state media, yesterday, on the occasion of the popular Chinese "Mid-Autumn Festival", also known as the "Moon Festival", according to the German news agency.
It states that Evergrande will be able to accelerate the resumption of construction and large-scale production, achieving the primary objective of ensuring the buildings are delivered so as to provide a responsible response to homebuyers, investors, partners and financial institutions.Keywords: