Evergrande: the Chinese state is preparing a delicate restructuring of the company

The Chinese state is preparing a delicate restructuring of Evergrande, at a time when the heavyweight of real estate, ultra-indebted, is struggling to repay its creditors. The group, which is crumbling under a slate of around 260 billion euros, has struggled for several months to honor its interest payments and its deliveries of apartments. In question: a regulatory tightening decreed last year by Beijing in the real estate sector to reduce the use of borrowing and therefore debt. Evergrande has since found itself short of cash to keep its activities afloat.

All-out and sometimes risky investments (tourism, leisure, digital, electric car …), when its finances allow it, also explain the precarious situation of Evergrande. On November 6, the group should have paid a reimbursement of 82.5 million dollars (73.1 million euros). He had an additional month’s grace period, which ended on Tuesday. Some creditors have still not been reimbursed, according to the Bloomberg agency, which places the group in default of payment.

Chinese giant sounds the alarm

In September, the firm admitted for the first time that it might not be able to honor all of its commitments. Despite several missed deadlines, Evergrande had hitherto always managed to repay its creditors in extremis. But as Tuesday’s payment approached, Evergrande sounded the alarm bells late last week. Its founder, billionaire Xu Jiayin, had been summoned by the authorities of Guangdong province (south), where the group is headquartered. And the authorities have dispatched to the head of Evergrande a working group “to supervise risk management”. Some analysts believe the measure marked the start of a restructuring of the company, which will likely take years.

Towards a “Lehman” scenario?

Evergrande says it employs 200,000 people and indirectly affects 3.8 million jobs in China. Any bankruptcy would have catastrophic consequences for the Chinese economy but also on the social level with a risk of unrest. This is why, “the Chinese state is seriously involved in the management of the situation”, underlines the analyst Shehzad Qazi, of the research firm China Beige Book. For the moment, Beijing is not ready to put its hand in its pocket to save the group.

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On the other hand, many assets will be sold to find liquidity, warns analyst Chen Long, of the Trivium firm in Beijing and specializing in the economy. The communist power will tackle a “controlled dismantling” of Evergrande, wants to believe Mr. Qazi. Real estate and construction account for more than a quarter of China’s GDP and serve as a powerhouse for many other sectors, such as steel and furniture. Evergrande’s setbacks lead to a crisis of confidence among potential buyers.

In recent months, sales and prices of real estate have been on the decline in many Chinese cities. Most analysts, however, deem a Lehman-style scenario unlikely for Evergrande as the markets anticipated these difficulties. Conversely, the bankruptcy in 2008 of the American investment bank had precipitated the planet in the worst financial crisis since 1929. An economic crisis had followed.

The other promoters in difficulty

In addition, there are difficulties in accessing credit. As a result, at least ten promoters are struggling or are unable to repay loans. Sunshine 100 missed a payment of $ 170 million (150.6 million euros) on Sunday, as well as interest. Kaisa, one of the most indebted real estate groups, was due to pay a repayment of $ 400 million on Tuesday. Of the 10.2 billion dollars (9 billion euros) of foreign bonds not repaid this year by Chinese borrowers, 36% relate to real estate boxes according to the Bloomberg agency.

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The Evergrande situation has similarities to that of the Chinese conglomerate HNA, a tourism and aviation giant. Ultra-indebted after acquisitions abroad, the private juggernaut had launched bankruptcy proceedings in January. HNA owns an airline and was once one of the largest employers in China. The justice recently approved the division of the group into four entities, without this shaking the markets.

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