The world’s most indebted company’s predicament has deteriorated when it was revealed that it had missed a major payments date.
Evergrande, a Chinese property developer with debts totaling more than $300 billion (£228 billion), has defaulted on interest payments to overseas investors.
Evergrande was declared in default by Fitch, a rating agency that assesses a company’s financial risk.
The problem has alarmed investors, who are concerned that the crisis would spread to China’s property and banking industries.
On Monday, Evergrande was supposed to pay interest on $1.2 billion in overseas loans. However, the funds had not been transferred as of Wednesday.
Evergrande was declared in default by Fitch, one of the world’s largest credit rating agencies, on Thursday, a step that may stymie the company’s restructuring negotiations with investors.
Fitch said it contacted Evergrande about the non-payment but received no answer. Fitch’s risk ratings are keenly watched by significant investors looking to deploy billions of euros. “As a result, we’re thinking they weren’t compensated,” the report stated.
Evergrande has been selling assets to pay off debts to customers, investors, and suppliers in recent months.
The business claimed in a statement last Friday that it could not promise “to meet its financial commitments,” causing its stock to plummet.
Hui Ka Yan, a businessman from Guangzhou, formed Evergrande, formerly known as the Hengda Group, in 1996.
Evergrande Real Estate now has over 1,300 projects in over 280 locations around China.
The Evergrande Group has expanded to include far more than just real estate development.
Its activities include wealth management, electric car production, and food and beverage manufacturing. It even owns Guangzhou FC, one of the country’s most popular football clubs.
Mr Hui was once Asia’s richest man and, despite his fortunes plummeting in recent months, Forbes estimates that he has a personal fortune of more than $10 billion (£7.3 billion).
Evergrande borrowed more than $300 billion to develop quickly and become one of China’s largest enterprises.
Beijing enacted new laws last year to regulate the amount due by large real estate developers.
Evergrande was forced to market its properties at deep discounts as a result of the new rules, in order to guarantee that money was flowing in to keep the company viable.
It is currently struggling to make interest payments on its loans.
Evergrande’s stock has dropped over 90% in the last year as a result of the uncertainty.
Evergrande’s difficulties are critical for a number of reasons.
To begin with, many individuals purchased land from Evergrande before construction began. They have made deposits and may lose their funds if the company fails.
Companies that conduct business with Evergrande are also present. Construction and design businesses, as well as material suppliers, are at danger of suffering significant losses, which might lead them to file for bankruptcy.
The third factor is the possible impact on China’s financial system: if Evergrande defaults, banks and other lenders may be obliged to cut back on lending.
This might result in a credit crisis, in which businesses are unable to borrow money at reasonable rates.
A credit crisis would be disastrous for the world’s second biggest economy, as businesses that are unable to borrow find it impossible to expand and, in some circumstances, cease to exist.
This may frighten international investors, who may regard China as a less appealing location to invest.
Some observers believe Beijing may intervene because of the potentially catastrophic consequences of such a massively leveraged corporation falling.
“Rather than risk disrupting supply networks and enraging homeowners,” says Mattie Bekink of the Economist Intelligence Unit, “we think the government will probably find a solution to guarantee Evergrande’s core business continues.”
Others, on the other hand, are unsure.
Hu Xijin, the prominent editor-in-chief of the state-backed Global Times newspaper, said on China’s messaging app and social media platform WeChat that Evergrande should not rely on a government bailout and instead must preserve itself.
This is also in line with Beijing’s goal of reducing corporate debt, so a high-profile rescue may be regarded as a negative example.