China Evergrande Group is quickly becoming the biggest financial worry in a country with no shortage of them. With $300 billion in liabilities and links to myriad banks, Evergrande would send shock waves through the financial system and the broader economy should calamity strike. Hui Ka Yan, the billionaire owner, has sought to reassure bankers that the property company will pull through, even as its stock price craters and its bonds point toward potential default. Investors aren’t sure how. They’re also asking whether major Chinese companies are still considered too big to fail by the central government, which prizes stability -- and what happens if they’re not.

1. What’s Evergrande? 

Hui founded Evergrande (formerly called the Hengda Group) in 1996 in the southern city of Guangzhou and expanded the real-estate developer, largely by borrowing. Evergrande Real Estate owns more than 1,300 projects in more than 280 cities, according to a company website. The group now goes far beyond homebuilding, with investments in electric vehicles (Evergrande New Energy Auto), an internet and media production unit (HengTen Networks), a theme park (Evergrande Fairyland), a soccer club (Guangzhou F.C.) and a mineral water and food company (Evergrande Spring), among others. It reported an adjusted core profit of 30.1 billion yuan ($4.7 billion) for 2020, the second annual drop in a row, and revenue missed analysts’ estimates.

2. What started the trouble? 

The world’s most-indebted developer had a liquidity scare in 2020. Evergrande reportedly sent a letter to the provincial government of Guangdong (Guangzhou is the capital) in August, warning officials that payments due in January 2021 could cause a liquidity crisis and potentially lead to cross defaults in the broader financial sector. Reports of the plea for help emerged on Sept. 24, sending Evergrande’s stock and bonds tumbling even as the company dismissed the concerns. The letter, which was widely circulated on social media, was verified to Bloomberg at the time by people familiar with it, but Evergrande later disputed its authenticity. Crisis was averted soon after when a group of investors waived their right to force a $13 billion repayment.

3. That wasn’t enough?

The reprieve was temporary, as there was still lots more debt coming due later. Evergrande outlined a plan to cut its $100 billion debt pile roughly in half by mid-2023, including a series of assets sales and stock offerings. (The company has some $80 billion worth of equity in non-property businesses, according to Agnes Wong, a Hong Kong-based analyst at BNP Paribas SA.)

4. How’s it going? 

Evergrande has raised about $8 billion this year as of August, selling shares in its EV unit, HengTen, a Hangzhou property firm and a regional bank. It’s also said to be exploring a listing for its tourism business and possibly the water business too. None of those offer quick fixes, however, because any sales probably wouldn’t be completed before next year. Meanwhile, the company’s debt has been repeatedly downgraded; Fitch Ratings said on Sept. 8 that a default seemed probable.

5. What about more borrowing?

Hui’s been under pressure from the government in Beijing to cut borrowing in recent years. But he could still tap fellow tycoons, as he’s done in the past. He increased financial ties with real-estate empires run by members of the Big Two Club, so-called because of their fondness for a Chinese poker game. In all, the three poker pals were involved in at least $16 billion of transactions with Evergrande over the past decade. Another benefactor emerged in July when Asia Orient Holdings Ltd., led by secretive tycoon Poon Jing, added to its big position in Evergrande bonds.

6. How much time is there? 

Not much. Next March, $2 billion of Evergrande’s outstanding bonds come due, followed by $1.45 billion the following month. While Evergrande has repaid all its public bonds this year, refinancing in 2022 would be challenging if the developer’s access to capital markets doesn’t recover in time, S&P said. 

7. Any chance of a government bailout?

The central or provincial governments or state-owned enterprises could step in with some sort of lifeline or forced restructuring. Beijing was said to have instructed authorities in Guangdong to map out a plan to manage the firm’s debt problems, including coordinating with potential buyers of its assets. Regulators in September signed off on a proposal to let Evergrande renegotiate payment deadlines with banks and other creditors, paving the way for another temporary reprieve. 

8. Why wouldn’t they save it, if it’s so important?

It’s a dilemma. A bailout would tacitly condone the type of reckless borrowing that’s gotten one-time high-flyers like Anbang Group Holdings Co. and HNA Group Co. into trouble too. Ending moral hazard -- a tolerance in business for risky bets in the belief that the state will always bail you out -- also would make the financial system more resilient over the long run. But allowing a big, interconnected company like Evergrande to collapse would reverberate across the financial system and also be felt by many millions of Chinese homeowners. Such pain could stir discontent and weaken the Communist Party’s control. 

9. Is Hui well-connected?

He seems to be. When President Xi Jinping marked the centenary of the Communist Party’s founding with a fiery speech proclaiming his nation’s unstoppable rise, there, overlooking the festivities in Tiananmen Square, was Hui. Born into poverty, the son of a wood cutter has been a party member for 35 years and has invested in areas endorsed by the top leadership, such as electric vehicles and traditional Chinese medicine. He’s a prominent philanthropist, although his net worth has taken a beating this year, and his soccer team purchase indicates he shares Xi’s passion for the sport.

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