Evergrande: Too Big To Fail, Or Beyond Rescue?

Key Takeaways:

• Evergrande has more than 500 billion yuan in delinquent debt that must be restructured, or it could face potential liquidation
• The company is involved in 2,002 unresolved lawsuits worth 30 million yuan or more each

By Lau Chi Hang

Just when it looked on the verge of collapse, China Evergrande Group’s (3333.HK) crumbling house has found a friend in the Hong Kong court system. That suggests the embattled real estate developer’s thousands of creditors might be easing their pressure on the company after months of relentless jockeying in their effort to get some of their money back.

The Evergrande case took an unexpected twist last Monday, when the Hong Kong High Court that was threatening to order the company’s liquidation suddenly delayed such a potential move and gave it until Jan. 29 to reach a deal with its foreign creditors.

A company based in the Pacific island nation of Samoa first filed a petition against Evergrande last year, starting the clock running for the company to reach restructuring deals with its major foreign creditors. Many believed last Monday was the final deadline to resolve the matter, but the court decided to adjourn the case until January after creditors didn’t clamor for a liquidation.

The last-minute reprieve for a company that has become a poster child for China’s property woes suggests creditors might not want to see Evergrande’s demise quite so soon. Instead, they may still be weighing the pros and cons of whether a liquidation is their best course of action.

Shares Rally

The delay sparked a rally that boosted Evergrande’s shares as much as 22% that morning, even as shares of many of its peers fell. The stock ended the day up 9.2% at HK$0.26, though the shares are a mere shadow of what they were just a few years ago when China’s property market was still booming.

Even before the hearing, Evergrande’s stock was already on shaky ground when a short seller targeted it just days before the court date. The institution, GMT, suggested Evergrande had overstated its revenue for years, and even questioned whether the company was ever profitable. It also implied the company was insolvent and relied on borrowing to stay afloat. Evergrande gave a boiler-plate response, saying only the report had no basis in facts.

One can’t help but wonder what this short seller hoped to achieve by attacking such a wounded animal like Evergrande, whose share price already factors in too many woes to absorb more. And any positive news, no matter how small, could easily drive up the stock and saddle GMT with big losses.

Still, Zhao Changlong, chairman of the company’s Evergrande Real Estate subsidiary, suddenly resigned after the attack, while staying on as legal representative and general manager, reflecting the nonstop pressure the company is feeling on just about any kind of development.

Evergrande is mired in debt. Its interim results showed that at the end of June, its liabilities totaled 2.39 trillion yuan ($335 billion). Its liabilities excluding contractual liabilities totaled 1.78 trillion yuan, including 624.8 billion yuan in borrowings, 1.06 trillion yuan in accounts payable and other liabilities of 102.9 billion yuan. The company’s total cash on hand and restricted cash was a pittance by comparison at just around 14.4 billion yuan.

Flood Of Lawsuits

As of the end of October, Evergrande was also mired in a tangle of 2,002 pending legal cases each involving 30 million yuan or more, cumulatively totaling 470.8 billion yuan. The company also said its total delinquent debt stood at 301.4 billion yuan, and 205.9 billion yuan worth of its commercial notes were also overdue, adding up to more than 500 billion yuan in delinquent bills.

As a leading Chinese developer, Evergrande is being viewed as a reference for how creditors might treat its other debt-laden peers. Some believe that an Evergrande liquidation would yield far less cash and other assets than needed to repay its creditors, and thus forcing it to liquidate may not be in creditors’ best interests.

The company has 190 million square meters of land in reserves that are one of its biggest assets. But the Chinese property market is so weak right now that any sales of the land or unfinished projects could further depress prices, hurting not only Evergrande but also the overall market.

In addition, an Evergrande liquidation would affect many related enterprises. For example, some of its bank loans may instantly turn bad. But other loans from entities like construction companies, real estate agencies, and other service providers would bleed out more slowly. A liquidation would also throw a major spanner into completing the company’s many stalled projects, leading some to suggest Beijing might eventually step in to sort things out.

Wishful Thinking?

Many believe that Evergrande is “too big to fail” and that the central government will eventually come to its rescue. But is that just wishful thinking? From what we’ve seen, the government doesn’t seem set on bailing out Evergrande for several reasons. First and foremost, the company’s debt is too huge. Such a bailout might also send the wrong signal, leading more enterprises to ask for similar assistance.  

The central government recently drafted a list of 50 property enterprises that would be eligible for financing support if necessary. From looking at this list, it’s obvious the government’s intent is to support some relatively strong players in case they encounter negative rumors or short-term liquidity problems that could threaten their stability. But companies like Evergrande that expanded recklessly and accumulated too much debt aren’t qualified for such support, at least not yet. 

The central government is leaving companies with heavy foreign debt to largely deal with that on their own. In that regard, foreign investors who snapped up such debt looking for high returns need to bear responsibility for the high risks as well. It remains to be seen whether Evergrande can ultimately reach a restructuring deal with these creditors to avoid liquidation. But either way, the central government is unlikely to rescue these investors that made their own decisions and now are paying the price. 

This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.