Embattled Chinese developer Evergrande's debt troubles pile on

Intensified worries over whether China's biggest home builder - and the world's most indebted property developer - can pay off its dues have raised the question if a bailout may be imminent.

Evergrande Group is among the companies in the government's cross hairs as China seeks to curb the growing debt problems of its high-flying private firms.

Analysts told The Straits Times that the fate of Evergrande is worrying, especially after last week when news of a legal scuffle with one of its creditors caused the share price of the Hong Kong-listed company to hit a low of HK$6.93.

Its price continued its slide on Monday (July 26) to HK$6.70, a record low. Evergrande's shares have been down 51 per cent since the start of the year.

There was a slight uptick of 9 per cent last Thursday after Evergrande said the quarrel with China Guangfa Bank was settled.

Guangfa had sought to freeze Evergrande's assets with a court order earlier this month over an unpaid loan of 132 million yuan (S$27.7 million).

Evergrande retorted July 19 that the loan was due only in March next year, and threatened to sue the lender for abusing legal procedures.

Still, the quarrel spooked investors who took the spat as a sign of Evergrande's worsening relationship with its creditors.

The latest bump on founder Hui Ka Yan's road to pay off Evergrande's debt of 670 billion yuan, as at the end last year, has raised more questions on whether the government will bail out the company.

Evergrande is among a group of Chinese companies that diversified aggressively over the past decade by borrowing heavily from state-linked banks.

But that has changed, especially for developers when policymakers last year drafted metrics called the "three red lines" that builders have to meet to borrow more money in a move to curb ballooning debt.

Evergrande had failed the three red lines test, and vowed in March to pass by 2023.

Other companies that have been hit by China's tightening include entertainment conglomerate Dalian Wanda Group, headed by China's once-richest man Wang Jianlin, financial giant Anbang Insurance Group and aviation group HNA.

Wanda has been trying to pull itself out of the red while Anbang Insurance applied to be disbanded and liquidated last September. HNA is undergoing restructuring after failing to pay off its debt.

Analysts said that China's increased tolerance for defaults does not bode well for Evergrande.

Dr Zafar Momin, an MBA lecturer at the Nanyang Business School, said the Communist of Party of China (CPC) is unlikely to "selectively bail out Evergrande from the company's huge debt burdens and prior mismanagement actions", even if ties between Mr Hui and the party are good.

Mr Hui was invited to the CPC's centenary party in Beijing earlier this month, which encouraged speculation that the government may be softening its stance towards the billionaire.

DBS Bank macro strategist Chang Wei Liang said the government would prefer to let the private sector fix Evergrande's debt problems.

"China has been keen to instil credit market discipline by allowing more defaults among state-owned enterprises."

But intervention may still be necessary if Evergrande's fall threatened financial or social stability, analysts said.

Evergrande has more than 1,300 projects, mostly residential properties, in over 280 cities in China, according to its website. It also makes electric cars and runs video platforms, theme parks and produces bottled water.

Mr Chang said that if Evergrande collapses, prospective home owners may end up "in limbo and face losses", dampening overall buyer sentiment.

Property prices in less developed cities where Evergrande has significant projects could be hit, he added.

Dr Momin said that buyers, brokers and banks will be among those badly hit, should Evergrande collapse, given that it is a huge player in the market.

"The Chinese government will need to assess whether... letting Evergrande collapse will lead to a stronger and more resilient real estate sector in the longer term," he added.

In June, Chinese regulators asked Evergrande's creditors to conduct stress tests to check if they could cushion an Evergrande default.

One way for the government to support Evergrande is to introduce investors formerly from state-owned enterprises, said credit analyst Zhou Chuanyi from Lucror Analytics.

Associate Professor Lawrence Loh at the National University of Singapore Business School said a bailout may not be out of the question, given that e-commerce giant Suning received a bailout earlier this month.

"There is no magic formula or even any precedent to abide by. We have already seen contrasting approaches by the government," he added.

Source: The Straits Times