China Evergrande Group is quickly becoming the biggest financial worry in a country with no shortage of them. Fears of a default by the developer, with $300 billion in liabilities and links to myriad banks, have roiled global markets as investors assess the potential impact on the financial system and the broader economy. Evergrande’s stock and bond prices have cratered, and it’s far from clear how Hui Ka Yan, the billionaire owner who’s survived many crises in the past, will pull through this time.

1. What’s Evergrande? 

Hui founded Evergrande (formerly called the Hengda Group) in 1996 in the southern city of Guangzhou and expanded the company through massive borrowing. Evergrande Real Estate owns more than 1,300 projects in 280 cities, according to a company website. At the end of June it was committed to building the equivalent of about 1.4 million individual properties, according to Capital Economics. The group 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. With more than 200 offshore and almost 2,000 domestic subsidiaries, Evergrande has about 2 trillion yuan ($310 billion) in assets -- equivalent to 2% of China’s gross domestic product, according to Goldman Sachs Group Inc. calculations.

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. 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 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. In September Evergrande sold a 20% stake in a regional bank for about $1.55 billion, but agreed to use all proceeds to settle debts with the lender. It was said in October to have agreed to sell a 51% stake, worth roughly $2.5 billion, in its property services arm to Hopson Development Holdings Ltd., according to the report in Cailian, a Chinese financial news platform. Neither company commented on the report.

5. Why hasn’t all that calmed things? 

None offer quick fixes, given Evergrande’s huge liabilities and looming debt maturities. The company’s debt has been repeatedly downgraded; Fitch Ratings and S&P Global Ratings have said that a default seems likely. Another potential flashpoint is whether Evergrande can repay high-yield wealth management products that it sold to thousands of retail investors, including many of its own employees. China’s housing market is also slowing markedly amid regulatory curbs and fears of a potential fire sale of Evergrande properties.

6. What about more borrowing?

Asia’s biggest issuer of junk bonds hasn’t sold a single dollar note since January 2020 as it looks to reduce its debt load. In any case, Hui’s been under pressure from the government in Beijing to cut borrowing in recent years. He’s also losing support from some fellow tycoons who have backed him in the past. Chinese Estates Holdings Ltd., controlled by billionaire Joseph Lau’s family, has been selling shares in Evergrande and indicated in September it could unload its entire stake at a loss of about HK$10.4 billion ($1.3 billion).

7. How much time is there? 

Not much. Evergrande needs to make $669 million in coupon payments through the end of this year. Some $615 million of that is on Evergrande’s dollar bonds, Bloomberg-compiled data show. Next March, $2 billion of Evergrande’s outstanding bonds come due, followed by $1.45 billion the following month. The company has already missed several coupon payments, though many of the notes have 30-day grace periods. 

8. Has there been fallout for other developers?

Plenty. High-yield bond spreads have soared after several developers either defaulted or signaled trouble. Fantasia Holdings Group Co. in early October defaulted on a $205.7 million bond, and Sinic Holdings Group Co. said days later it didn’t expect to repay a $250 million note. Property firms’ missed payments have made up 36% of the record 175 billion yuan in onshore corporate bond defaults this year, Bloomberg-compiled data show.

9. 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 Evergrande’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. Still, there are few signs that any direct rescue is coming for Evergrande.

10. 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. 

11. 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. It remains to be seen whether these political ties will be enough this time.

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