Evergrande, the world's most indebted real estate agency, makes investors nervous

What was the second largest property developer in China until a few months ago is on the verge of collapse. Shares of the

Evergrande

group

fell 10.63% on Monday on the Hong Kong Stock Exchange, registering their lowest level of trading in more than 11 years. Investors fear that a possible bankruptcy of the "Great White Rhino" will affect all of China, as the company's liabilities represent about 2% of the Asian country's GDP. Last week, the real estate company admitted that it probably cannot honor the debt of around 254,000 million euros that it has with its creditors.

China is the world's largest economy and analysts indicate the real estate sector accounts for about 29% of its GDP. The bankruptcy of Evergrande, its second largest real estate company, would not only mean the destruction of millions of direct and indirect jobs, but an economic catastrophe that specialists are already calling a potential Chinese Lehman Brothers. This Monday, the Hong Kong Stock Exchange has suffered a fall of 3.2% dragged by the collapse of the company.

One of the great fears is the possible “contagion effect”.

Evergrande's main creditors are Chinese banks and investors, who would lose billions if the giant defrauded its financial obligations.

On the other hand, Standard and Poor's indicated in August that the company had outstanding debts with the suppliers and contractors of its projects, to whom it owes approximately $ 37.16 billion.

What is China Evergrande?

Evergrande was founded in 1996 by Xu Jiayin, listed in December by

Forbes

magazine

as the 10th richest billionaire in China.

The company has 200,000 employees and generates 3.8 million indirect jobs.

It has nearly 1,300 projects in 280 cities and has sold houses to 12 million owners, according to its website.

In 2015,

Fortune

magazine

listed Evergrande as 43rd on its Fortune 500 list of the world's largest companies.

She is based in Guangzhou, the capital of the Guangdou region, where she also owns the local soccer team, Guangzhou FC.

The company is listed on the Hong Kong Stock Exchange and has expanded in recent years into the food, auto, life insurance, audiovisual, amusement park, technology and entertainment sectors.

The indebted giant

Evergrande's large debts were not a secret.

Already in 2015 the company was known for issuing extremely profitable bonds with which it financed its vertiginous growth.

That year, the company reported that its debt amounted to 57,000 million dollars, earning the nickname of the "most indebted real estate in the world."

Their problems surfaced in August 2020, when the Xi Jingping government announced measures to control the indebtedness of real estate companies.

That same month, the company sent a letter to the Guangdou government, claiming that it had liquidity problems and that this could lead to defaulting on its loans.

The letter came to light in September of that year and called into question the company's ability to meet its payments.

From there, Evergrande began a race to cut its debt.

The company structured a plan with the goal of cutting its debt in half by 2023. In the following months, the group put properties up for sale at a 30% discount and began selling parts of its automotive and technology businesses.

However, these measures were not quick enough and the company continued to sink into debt.

It lost liquidity and its credit ratings continued to decline, its bonds lost value and its stocks took a nosedive.

In July 2020, the Chinese justice froze part of the company's assets as a result of a lawsuit from the Guanfa bank and another from a contractor.

This was a critical blow for the company, which was already in a delicate situation.

S&P and Moody's downgraded their ratings further and more and more creditors revealed that the company owed them money.

Lawsuits and accusations of defaults began to rain down.

In August 2021, the company reported a 29% year-on-year decrease in net profits and warned that the lack of liquidity could put at risk the completion of real estate projects that had been paralyzed by the crisis.

Evergrande shares are currently trading at around € 0.23 on the Hong Kong Stock Exchange, an 83% drop from January.

This week, the company announced that it will not pay interest on loans at the end of the month.

Bloomberg sources say that the Committee on Financial Stability and Development, China's largest financial regulator, has given the green light for the company to clear its payments and renegotiate the terms of its debts with its creditors. 

Evergrande issued another statement Tuesday in which it claims to have hired financial advisers to explore "all feasible solutions."

In the same document, the company advises that there is no guarantee that it will be able to meet its financial obligations in its current situation.

Bloomberg says that by the end of 2021 the real estate company has to pay its creditors about 669 million dollars in bonds and that, by March and April 2022, it will have to pay another 3.45 billion.

Evergrande also owes hundreds of thousands of clients who advanced money for properties that are yet to be built.

Last week, thousands of people have demonstrated in front of their offices demanding the return of their money. 

Domino effect

The bankruptcy of the real estate group would be a catastrophe that would drag the entire ecosystem that revolves around it.

It would force creditors to bear the costs and bankrupt hundreds of companies.

On top of that, UBS notes that $ 19 billion of Evergrande's debt is in offshore bonds, so its collapse would also impact outside of Chinese borders. 

At the moment it is not known if the Xi Jingping government will allow the real estate company to collapse or if it will rescue it.

The People's Bank of China was forced this Friday to inject $ 14 billion to reassure the market, which was uneasy about the possible fall of the giant.

The

Washington Post

claims that Beijing has asked the Guangdong authorities to draw up a plan to manage the company's debt. The plan would include coordination with potential buyers of its assets, however, it is not yet known whether Evergrande will be rescued, restructured or liquidated.