Evergrande

Who is Evergrande?

The Evergrande Group is one of China’s largest property developers with a $39B market cap and over 200,000 employees. Within China alone, the property developer claimed it owns over 1200 projects across more than 250 cities. Currently, the property giant has amassed over $300B in debt. The magnitude of Evergrande's investments has recently raised concerns regarding their debt obligations.

What went wrong?

For years, Evergrande had a successful strategy to aggressively borrow and use deposits from regular investors to buy up land leases or on property development. However, in August 2020, the Chinese Government cracked down on leverage to prevent another potential financial crash that was experienced in 2008. The intervention from the Chinese government resulted in the fast-growing business model that Evergrande was relying on for several years to become futile. The sudden halt in cash flow meant that Evergrande was no longer able to borrow more money or take pre-sales. Now, they were no longer receiving profits from pre-sales, they were unable to build more properties which once again meant that they could no longer create pre-sales for the new properties - rinse and repeat. 

Should we be worried?

Although the Evergrande situation is rapidly changing and unfolding, there is an evident level of uncertainty as to how bad it could get. Hypothetically, If the Chinese Government does not intervene at all, Evergrande would go into liquidation. All Evergrande’s properties would be sold off into the market which would result in a huge flood pushing prices down. For the hundreds and thousands of investors who had put deposits on their pre-built houses, well, they would lose their entire deposit. It should be noted that the top four bondholders (Ashmore, BlackRock, UBS, and HSBC) of Evergrande are all international, meaning that the flow-on effects of the potential default will pan much further than just China.  

Government Intervention

China's central bank injects liquidity by adding $16.8b to its banking system but hasn’t specifically said if they will be able to completely bail them out as doing so will portray the notion that any business will be able to do whatever they want with a safety net.

Price Action

Evergrande has given shareholders a return of -78% YTD. As the future of Evergrande is in part held in the hands of the Government, price action should remain stagnant for some time to come. Along with the price action of the Evergrande itself, its corresponding default swap index rapidly increased in value on September 20th to just over 36 basis points per dollar of debt, up from 30 a few days earlier. If this continues, and edges closer to the 50 mark, this would make for an even more worrying future for Evergrande. 

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