A brutal year for Evergrande is going from bad to worse as the billionaire president of the highly indebted real estate group and his investors face financial problems, credit downgrades and a U-turn in an expected payment.
Evergrande shares fell 12 percent on Tuesday in Hong Kong after the group, which has nearly Rmb2tn ($ 309 billion) of liabilities, announced it would cancel a planned special dividend.
That marked the last blow for Hui Ka Yan, who was once the richest person in China, thanks to Evergrande’s role in China’s urbanization waves. His personal fortune, which stood at $ 34 billion last July, has taken a substantial hit after a 72% drop in the developer’s share price over the past year.
Hui would have benefited from Evergrande’s first payment since 2018 given his 70 percent stake, but his timing had caught the attention of investors. Evergrande, one of China’s leading real estate groups, has faced growing concern over a possible cash shortage as Beijing seeks to control the industry.
Over the past week, a wave of sinister events related to Evergrande’s access to financing has wiped out billions of dollars from the company’s market value and has piled up even greater pressure on Hui to navigate relationships with lenders, customers and Beijing.
Late on Monday, S&P Global Ratings downgraded Evergrande’s credit rating, following similar decisions by Fitch Ratings and Moody’s last month.
“There just isn’t enough cash for Evergrande to pay off its next loans unless it refinances it or generates enough cash to fill that gap,” CreditSights analyst Luther Chai said, based on the developer’s latest annual report.
As credit conditions tightened in China, scrutiny turned to Evergrande’s sales model. In addition to borrowing from banks and investors both in China and globally, where it has $ 6 billion in dollar-denominated debt due next year, Evergrande has relied heavily on the sale of properties before finishing construction to maintain cash flow through the business.
Pre-sales calls, in which customers often borrow through mortgages in addition to a deposit to pay for a property, are widespread in China, although the rules and requirements vary.
Evergrande’s shares were sold early last week after a legal notice from Shaoyang authorities ordered the company to halt advance sales in the central Chinese city. The city later said that the restrictions, which were related to the alleged misuse of funds, would be reversed.
Later in the week, four banks, including HSBC, stopped offering mortgages for incomplete Evergrande developments in Hong Kong. HSBC declined to comment. Banks are considering reversing the decision, according to Bloomberg News.
In a statement, Evergrande said that progress on its Hong Kong projects “is still proceeding as planned” and that other banks maintain a positive outlook towards mortgages for unfinished projects.
“All those announcements independently are not really important, but taken together it is an indication that the pressure is really increasing on the group,” said Michel Lowy, chief executive officer of SC Lowy, a Hong Kong-based investment group. “The likelihood that they will run out of liquidity in the coming months as a result of that is increasing.”
Andrew Lawrence, an Asian property analyst at TS Lombard, said the presale model was “typically unstable.”
“As the pre-sale falls, the developer is forced to borrow more, banks ask for more pledged assets and higher collateral, providers request an advance payment and the pre-sale worsens as the developer reduces prices and end users they don’t trust the company to complete the development, ”he added.
Hundreds of frustrated homebuyer complaints about delayed projects appeared on Weibo, the popular Chinese microblogging platform.
A home buyer in the southwestern city of Chengdu said he had paid 1.1 million rupees in 2019 for an unfinished apartment in Evergrande, but that the project had been delayed and was unlikely to be completed by the due date on next july.
“That would be a huge blow to my family as we have drained our savings to make the Rmb300,000 down payment and are under pressure to pay mortgages and rents at the same time,” he added. “I bought the apartment because of Evergrande’s reputation as a Fortune 500 company.”
Evergrande did not respond to a request for comment.
Evergrande’s banking relationships have also come under pressure, raising concerns about its ability to refinance. A Jiangsu province court this month froze Rmb132m from Evergrande’s deposits at the request of Guangfa Bank as part of a dispute over early payment terms, prompting a sell-off of shares after the order circulated among merchants. . Evergrande released a statement saying it would sue Guangfa, although it later said the dispute had been resolved.
Evergrande said in late March that its interest-bearing debt had fallen to 674 billion rupees, 23% less than a year earlier. The government’s “three red lines” policy requires developers to reduce their loans based on certain balance sheet metrics.
One outlet to raise cash could be the exotic array of assets Evergrande has amassed, including a bottled water company, a stake in an electric vehicle maker worth more than Ford, and even a pig farming business.
“I think there is a decent chance that in the next few months they will sell nonessential assets, find partners, sell stocks, raise some money, deliver,” Lowy said. But, he added, the situation was ultimately “binary” because it boiled down to how the central government viewed the prospect of restructuring.
S&P said Monday that Evergrande “remained an asset-rich company,” but cited the risk of losing more access to financing. He also noted that the company had reduced prices for contracted sales to an average of Rs 8,100 per square meter, compared to a peak of more than Rs 10,000.
“The entity has little room to continue cutting prices if it wants to remain profitable,” said the rating agency.