In March 2012, US-based short seller Andrew Bam received a mysterious package without a return address. Inside, a 68-page document made explosive claims about a Chinese property developer who was then little known outside his home market.
The Left’s next report on the Hong Kong-listed Evergrand Real Estate Group, which complained that it would be “bankrupt” and “seriously challenged from a liquidity standpoint”, made a profit of 1. 1.6 million after the share price fell, but was sued in a lengthy court. The regional market regulator costs him a lot more.
“I went a lot deeper into the matter,” said Bam, who has been known to spread “false or misleading information” and has been banned from the region’s financial markets. “I stopped counting bills after 1 million.”
This week, the Chinese company that came to embody the huge tsunami behind the biggest urban transformation in history was finally embroiled in a crisis that skeptics have repeatedly predicted over the past decade.
Evergrand’s name shone on trading screens from New York to London on Monday as its rapidly emerging liquidity problem in China since July erupted in global markets ahead of Thursday’s interest-paying deadline on its বিল 20 billion bond. . The money was not paid until Friday.
But it is the company’s total liability of $ 300bn, a large domestic sum earned through the purchase of land for the construction of residential apartments in hundreds of cities in China and the sale of them before the process is repeated.
The fate of the company, which is widely expected to require the biggest restructuring in China’s history, no matter what happens with interest payments, has emerged this week as an important test case for the property sector, which has long represented the country’s economic growth model but government policy. After the change is now under pressure to reduce leverage.
Billionaires playing insects
Evergrand was launched in 1996 by Hui Ka Yan, who previously worked in the steel industry, a year where less than a third of China’s population lived in cities. When the company was listed in Hong Kong in 2009 after a previous failed attempt, its shares rose 34 percent. By 2017, when China’s urbanization rate rose to 58 percent, Hui was the richest man in the country with a fortune of 45 45 billion and was known for playing poker with fellow Hong Kong billionaires.
Like many of China’s largest unions, the company has raised capital from Hong Kong’s stock and bond markets, which have largely shut down the global financial system. The left-wing tribunal noted that “huge analysts in Hong Kong were keen on Evergrand’s prospects in 2012”. As of last month, almost half of analysts in Hong Kong still had a buy rating on the stock, which has dropped to 84 percent this year.
Across the border, debt and the pace of growth of land reserves, which last year was enough to accommodate millions of people, continued to raise eyebrows. But many believed the business was able to rely on the support of big and important Beijing.
The investment of Chinese property developers – a large part of the $ 400 billion Asian high-yield bond market – relies on the “basic belief” that the central or local government will never “hit” – said a private equity chief executive in Hong Kong. .
“If you believe that the government will always enter the important point, you are going to take more risks,” said the man who forbade his own team to invest in Evergrand. “If you are a bond fund manager to fight for every base point of your bonus, it pays off every year.”
The government’s unveiling of the “Three Red Lines” rules in the summer of 2020 shattered that widespread belief, which raised concerns about asset bubbles in the wake of limited developer leverage gains just months after interest rates were cut.
“I think one of the most important things that has devalued people is the significant exemplary change in the government property sector,” said Nish Popat, co-lead portfolio manager for corporate debt at Emerging Markets, Newberger Berman. The broader outlook outside China has noticed that the company was too big to fail. “When we spoke to our Shanghai team,” he said, “they didn’t believe it was.”
At a time when some international funds were still buying Evergrand debt, Newberger Berman stepped down in July because he thought it was “uncomfortable.” The same month, news broke that a bank in Jiangsu Province had deposited deposits of its mainland subsidiary, with local authorities in Shawang, Hebei Province, halting construction of two of its projects. Both decisions are quickly reversed, and smaller than the size of the company, but hurt emotionally.
Evergrand warned of the risk of default in August, just days after Beijing’s unusually popular reprimand, instructing it to reduce its deficit and blaming the effects of “negative reporting” on its liquidity. Under pressure from three red lines, the company cut its debt from Rmb717bn at the end of last year to Rmb572bn in June. But over the same period its liabilities increased to Rmb1.97tn, and by then they were 10 times their 2012 level.
There have also been reports of unpaid bills from contractors, and the company is facing a record number of lawsuits in Chinese courts, although it still made a net profit in the first half of the year. Sales of its property have nearly halved from June to August and sales are expected to decline in September, usually a busy month.
Although global markets have settled on Evergrand’s liability this week, its assets have been under review for a long time due to its focus on unused housing stocks arising from the rise of Chinese construction.
Nigel Stevenson, an analyst at GMT Research, published a report on কোম্প 0 per share on the company in 2011 after inspecting projects in 16 cities. He noted that the company’s balance sheet, valued at ৫ 5 billion, contained nearly 1,000,000 car parking spaces, equivalent to its entire equity base, and criticized the quality of other assets.
“These assets still need to be funded, and they are definitely being funded at 10 percent, which is not long-term,” he said. “Eventually things got caught up with them.”
International fund managers have previously benefited from the high yields of Evergrand’s debt at a time when many of the global bond markets have traded at negative rates in Western monetary policy.
The bond was issued in 2017 with a coupon of 8.25 percent with payments on Thursday, and this week its price has dropped as low as 24 cents to the dollar. In a note to clients last week, UBS, which held m 100 million in Evergrand bonds for various filing dates between April and July, said they were trading “at or below normal recovery historical recovery values.”
In anticipation of a restructuring mount, some offshore investors are closely monitoring the company’s assets outside of China as it expands out of assets with a Hong Kong-listed electric vehicle company’s partnership that has yet to sell cars.
A team of international investors has hired law firm Kirkland & Ellis and investment bank Moelis & Co to advise on a possible restructuring.
“The likelihood of giving preference to Evergrand offshore noteholders is rapidly declining and is remarkably low,” said John Han, a lawyer for US firm Cobre & Kim, who is in talks with several major US fund-based Evergrand bonds. . “The Chinese government is going to give priority to retail investors and households and domestic banks over debt funds in the Western crisis.”
The S&P, which expects a default, does not expect direct government involvement but expects Beijing to seek an “orderly restructuring”. In mainland China, the future of Evergrand will be a highly sensitive process and a political test for President Xi Jinping, due to the involvement of ordinary citizens who have already paid for the apartments. The company has 778 projects across 223 cities, and last week retail investors landed at their Shenzhen headquarters to demand their money back.
Direct spillovers in international markets outside Asian high yield bonds are limited. But a significant failure could hurt confidence across the broader property sector, on which both the global commodity market and the local government economy rely heavily. In early September, land sales fell by 90 percent a year, while new home sales fell sharply. But new home prices across the biggest0 big cities still rose slightly year after year in August.
Andrew Bam, who has never been to China and relied on the internet and company filings for his bets against the company, said he did not feel “great” seeing the news published this week.
“I’ve never been in a situation where people congratulated you and you didn’t get anything out of it,” he said. “It simply came to our notice then [my] Life is so long, and now it has become part of financial history.
The Left’s five-year ban expires next month but it still has a question: “Will the court follow all analysts who set a 40 target?”
Additional reports from Edward White in Seoul and Tom Mitchell in Singapore