Chinese developer Evergrande defaults on part of its debt

The rapidly growing Chinese property developer, Evergrande Real Estate, defaulted on part of its 2017 debt this week after failing to get backing from its offshore unit. The news will not be made public, but the Chinese news media has reported that the company had been forced to default on 4.28 billion yuan ($683 million) of 7.95 percent dollar-denominated bonds. However, the payments have been delayed, and it’s unclear if the debt will finally be handed over to Evergrande.

Evergrande was originally put on watch by the credit rating agency Fitch for defaulting on offshore bonds after the developer raised capital from the market for a large luxury housing project in Shanghai. However, it delayed the debt to allow it to do some refinancing of its mainland loans.

Yet Evergrande’s onshore debt was well within credit ratings. Despite accounting for 10 percent of China’s home sales in 2017, Evergrande’s investments and general banking debt make up less than a tenth of the developer’s total debt load, which was more than 700 billion yuan in 2017. The development company didn’t have much problem paying off its mainland debts, which are primarily in the form of bank loans. That money was used to buy land, which is extremely profitable for any Chinese developer these days, owing to higher land prices in China. Some 5 percent of the company’s property sales are now from land purchases in recent years, and its full-year revenue increased from 51.77 billion yuan in 2016 to 72.83 billion yuan in 2017.

Nevertheless, Evergrande is widely known for deferring payments to creditors, and last year did not pay on some of its 2018 projects in Zhengzhou, Suzhou, Hangzhou, and Wuxi. Its management has argued that the bond payments were delayed to allow its offshore debt holder, China Everbright, to refinance. In October, Evergrande finally paid Everbright a little over $730 million, after the board’s decision to sell off its domestic assets.

But the bond default, if indeed it happens, would hardly prove any more beneficial for Chinese lenders. The Chinese government has been devaluing the renminbi recently in a bid to prevent a dangerous build-up of China’s growing debt. A default on offshore bonds would likely send shockwaves through the financial system, causing foreign investors to question their holdings in Chinese companies and cause uncertainty among offshore borrowers who may now start to doubt their ability to get financing from China.

Or perhaps there is some very good news in Evergrande’s partial bond default. If so, it might do the property developer good. The company, based in Guangzhou, has been trying to expand its presence overseas. Last year, it began developing a resort in Arizona, which is set to open next year. It also had plans to open properties in Florida, Las Vegas, and the Philippines, which also sounds promising for marketing a new hotel suite.

Read the full story at Bloomberg.

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