Monday, October 18, 2021

China’s biggest developer near to default, falling to ‘B’ credit rating

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Evergrande Real Estate Group, one of China’s biggest developers, is near to defaulting on dollar-denominated debt, and on Wednesday, S&P Global Ratings downgraded it three notches to “B,” from “B-.”

Evergrande is based in Guangzhou, China, and listed on the Hong Kong exchange. It is a large state-owned property firm that was founded by the Huayang clan, whose interests extend into real estate, banking, and insurance. One of the group’s founders was Wang Jianlin, an billionaire businessman who is now one of China’s richest men.

Evergrande also has some low-quality (and high-debt) subsidiaries, such as its real estate arm Evergrande Land Co.

The downgrade of Evergrande comes in response to a warning issued by Fitch Ratings about Evergrande’s “significantly weakened” financial position. Fitch cited the company’s debt-financed investment in the Three Gorges Dam, a project regarded as strategically important, as one of the reasons it had become incapable of servicing its obligations.

S&P echoed Fitch’s warning in its report on Evergrande’s creditworthiness. “The key developments we observe include loss of managerial control and control over some subsidiaries, plummeting internal controls, adverse external affairs, and structural and corporate governance challenges,” the S&P analysts said.

“We expect lenders to continue to support Evergrande because of the importance of the company’s business and its good rating history of ‘B+,’ which has a ‘bullet’ rating of ‘B+.’ We have a ‘negative outlook’ on Evergrande’s ratings, indicating that our outlook does not change significantly if there is no key improvement in Evergrande’s credit measures in the short term.”

Fitch has placed Evergrande under review, while assigning the company a negative outlook.

Evergrande may already be under scrutiny.

The development company also owns an 80 percent stake in a strategic real estate partnership in Shenzhen, China, with The E. H. Cheung Company Ltd., a listed company. Other shareholders include the Union Bank, a Shenzhen-based commercial bank, and the foundation of Hualiansu, the site of the Three Gorges dam.

“Evergrande is advised by Fairview PCC, HK Trusts, and Yun Ling, CFA,” a spokesperson for Evergrande told Bloomberg. “Over the course of the development, Evergrande applied for and received consent from this group of shareholders, all of which are indirect investors, and has agreed to comply with their respective obligations and business obligations.”

Fitch and S&P said that failure by Evergrande to meet the obligations on its debt would “increase the likelihood of a debt restructuring or outright default.”

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