(Un)expected lawsuit
Merchants issued an injunction from a Jiangsu court to freeze the Rmb132m deposit of $20 million owned by the Chinese subsidiary Hengda Real Estate Group and other of its businesses on Monday. This was made at the demand of China Guangfa Bank Co. As a result, Evergrande’s Hong Kong shares plunged 16%.
According to a declaration, Evergrande replied that it will sue Guangfa Bank, with the debt not due until March.
This trend is the latest symptom in China’s largest leveraged property developer’s growing market anxieties. In the past year, the company has tried to lower its leverage in the face of regulatory limits and increased price volatility in its stock and bonds. This raises more questions about the financial viability of the business.
Evergrande’s debt history
Nomura’s credit analyst Iris Chen argued that the court order was in conflict with a loan’s early reimbursement. She remarked:
‘Overall, we view this as negative news, indicating weakening bank channels which should further pressure [the group’s] liquidity’
For most of the past year, Evergrande was also under heavy market scrutiny due to its failure to record Hengda. That enabled investors, including Suning, to ask for returns for the Rmb130bn which they have invested. The majority of them however refused to ask for money, so as to prevent a cash crunch.
Hui Ka Yan (founder) met with national financial regulators officials in June to resolve the cash flow concerns of Evergrande as rapidly as possible. This year, the corporation liquidated around $8 billion in assets aimed at reducing debt and preserving investor trust.
Xu Jiayin, the chairman of China’s Evergrande Group, has become the world’s richest property developer. Four out of the top 10 are Chinese.
Evergrande is on the verge of a financial crisis
The Government of China has been silent about providing Evergrande with financial help in a program aimed at reducing moral risks. In June, Evergrande promised to settle unpaid trade invoices and declared it has never missed a public bond payment.
China Evergrande Group is a leading borrower on bond markets, which this year has created an uncomfortable situation as a result of the troubles of the bad debt manager Huarong, who owns the state of Beijing, and the failure of China Fortune Land Development developer to support the debtors in the country.
Shen Chen, who is a partner at Shanghai Maoliang Investment Management LLP, has said the following:
‘Evergrande is on the brink of a crisis. The company may find it more difficult to raise funding in the future, whether in public bond markets or shadow banking activities such as trust loans.’
Evergrande affiliates went down as well. In nearly two years, China Evergrande New Energy Vehicle Group Ltd. sank most, with Evergrande Property Services Group Ltd. losing 13%.
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