China Evergrande ‘likely to default’ within months – S&P

Embattled property giant China Evergrande is “highly likely” to default when it faces enormous repayment pressures early next year, according to S&P Global ratings.

The agency has released a report saying the property giant faces a big test in March and April 2022, when it will have to make a $3.5 billion repayment of principal for its public US dollar senior notes.

“At some point … Evergrande’s massive debt will catch up with it,” the S&P report said.

“The firm has lost the capacity to sell new homes, which means its main business model is effectively defunct.

“This makes full repayment of its debts unlikely.”

China Government looking to ‘soften the blow’

S&P says the Chinese Government wants to unwind Evergrande in a controlled fashion, or let an orderly debt restructuring take place.

“Authorities want to maximize the number of pre-sold homes Evergrande completes to protect the interests of homebuyers, and for it to largely repay the contractors and other small businesses that support the firm,” the agency said.

“Evergrande also has substantial assets that it can sell, and can use the proceeds to settle bonds or other obligations as they come due.”

Yesterday, Asia Markets reported that Xu Jiayin, the founder of China Evergrande Group, has sold personal shares, villas, mansions and private jets to inject cash into the struggling business.

Xu Jiyain
Evergrande Founder Xu Jiyain

Other Chinese developers facing similar fate

S&P says that it expects defaults for Chinese developers to increase over the next six to 12 months – a belief reflected in its recent ratings actions.

“We have recently downgraded seven Chinese developers to the ‘CCC’ level or below, which means we believe there is a default scenario for them,” it said.

Two of those seven developers have already defaulted.

“Moreover, according to the sensitivity analysis we conducted recently, about one-third of the rated Chinese developers’ liquidity could come under pressure under our most severe scenario stress test,” S&P said.

“This assumes contracted sales are 20% lower than our base-case projection, a 30% repayment of minority interests, and 30% early repayment of trust loans.”

In September, Asia Markets revealed there is one Chinese developer more leveraged that Evergrande.