Evergrande did not respond to a request for comment. Fitch said the company had not responded to its own request for confirmation about whether it had met or missed an $US82 million payment to bondholders due Monday,which prompted the ratings firm’s Thursday move.
Fitch on Thursday also put Kaisa,another large and distressed developer,into its “restricted default” category after the company failed to pay bondholders $US400 million earlier this week.
These defaults are testing a long-held understanding among foreign investors that Beijing would ultimately step in to save its biggest companies.
For years,many investors gave money to companies like Evergrande on the basis of this assumption. But more recently,authorities have shown greater willingness to let companies fail in order to rein in China’s unsustainable debt problem.
To emphasise this point,China’s central bank has blamed Evergrande’s “own poor management and reckless expansion” for its problems and said the crisis was limited to Evergrande. Yi Gang,the central bank governor,indicated Thursday that Evergrande would go through something resembling a typical reorganisation,suggesting a bailout was not in the cards.
“The risk of Evergrande is a market incident which will be properly handled in accordance with the principles of marketisation and rule of law,and the rights and interests of creditors and investors will be protected in accordance with the law,” he said.
Billionaire Hui Ka Yan founded Evergrande in 1996.Credit:Bloomberg
Evergrande had already said it would “actively engage” with its foreign creditors to come up with a plan for restructuring. But it is clear that Beijing will play a role. Earlier this week,Evergrande said officials from several state-backed institutions had joined a risk committee that would help the company restructure itself.
Beijing has been front and centre in the aftermath of past corporate disasters. Three years ago,Beijing seized control of Anbang Insurance Group after detaining its chair,who was later sent to prison for fraud. Early last year,local government officials stepped in to seize control of HNA,a transportation and logistics conglomerate saddled with debt from expensive overseas acquisitions. Under their guidance,the troubled company was pushed into administration.
Foreign investors challenge that trend at their peril. The Communist Party controls the local courts and has a history of leaving foreign investors with little or nothing.
Investors could go after assets overseas,but the process could be messy.
For more than a decade,Evergrande was China’s largest developer,minting money from a property boom on a scale the world had never seen. With each success the company expanded into new areas,such as bottled water,professional sports and electric vehicles.
“The thinking is that we need to understand what truly are the assets,what truly is the liability and in what form the company can survive.”
Michel Löwy,of investment firm SC Lowy,
But it borrowed too much to pay the bills it owed to banks,contractors and investors. Aside from its on-the-books debt of $US300 billion this year,some experts estimate its liabilities off the books could be another $US156 billion.
Its financial troubles are in part the result of Beijing’s attempt to get China’s housing market to cool off. Fearing a spillover into the broader financial system,regulators have cracked down on developers like Evergrande,forcing them to pay off the debt owed to banks and other financial institutions.
Evergrande struggled to sell off its sprawling empire. It failed to sell an electric vehicles business despite talks with interested buyers. Experts warned that buyers were waiting for a fire sale.
But a slowing property market and less demand for new apartments made things worse.
Evergrande often relied on a model of preselling apartments before they were fully built. As many as 1.6 million homebuyers were still waiting to move into Evergrande apartments in September when the company gathered its top executives and asked them to publicly sign what it called a “military order” — a pledge ensuring the completion of hundreds of development projects that had already been sold.
But to deliver on that pledge,Evergrande needed either to presell new properties in order to raise enough money to keep operating — or to find other sources of cash.
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Remarkably,for a few months Evergrande managed to continue paying bondholders. But few thought Evergrande would last long. Other Chinese developers began to struggle as investors panicked and sent their cost of borrowing to new highs. With limited access to financing amid a broader industry crackdown on borrowing,more than 11 real estate companies defaulted on their bonds this year.
As its troubles worsened,Evergrande said less and less about its prospects. To find out whether it had made its payments,the financial world had turned to bondholders to ask them whether they had received any money. Within China,censors suppressed any negative news.
Now investors must wait for whatever information Evergrande and Beijing deem worthy to release.
“The thinking,” said Löwy,of SC Lowy,“is that we need to understand what truly are the assets,what truly is the liability and in what form the company can survive.”