Another day, another revelation in the China Evergrande Group saga. The precariously perched Chinese property developer is believed to be sitting on a debt pile of A$408 billion.
This makes Evergrande the most indebted real estate company in the world — a record you don’t want if you can’t afford the repayments. Unfortunately, that is exactly the case.
In the latest development, ABC News has reported the company once again failed to make good on a $282 million payment to bondholders. This follows multiple other failures to make payments on its debts over the past week.
Additionally, the concerns for further economic fallout have heightened as other sizeable property developers miss their payment deadlines.
Reining in debt comes at a cost
The China government is adamant it is aiming to tighten the belt on rising debt and the speculative property market. As such, fears have escalated that Beijing may stick to its guns and avoid bailing out the company and its creditors.
This would send a definitive message on the risks of operating at high debt levels and providing capital to such businesses.
How much debt? Well, according to Simply Wall St, the property developer’s debt to equity ratio was 139% at the end of June 2021. This figure is based on the company’s debt reaching A$122 billion though this has skyrocketed beyond $400 billion in the past few months.
Typically, more than 40% debt to equity would be considered high in the financial world.
At the same time, Evergrande is reported to only have around $19 billion of cash and short-term investments on its balance sheet. Yet, even with this reported amount of cash, it seems the company is failing to meet its debt obligations.
As a result, investors are fearing a collapse of Evergrande could spill over to global financial markets. At this point, economists believe Beijing has the resources to contain any potential impact.
Joining Evergrande in defaulting
Potentially most worrying, Evergrande is not the only property developer skipping its debt paydays. Another company, Fantasia Holdings Group, listed on the Hong Kong exchange, announced a missed payment on Tuesday.
Reports indicate Fantasia was due to repay a $206 million bond on Monday but was unable to fulfil its debt obligation. A release from the company after entering a trading halt stated, “management will assess the potential impact of the financial condition and cash position of the group under the circumstances”.
Commenting on the news, S&P Global Ratings issued a statement stating:
Fantasia’s missed payment highlights its strained liquidity, despite its reported sufficient cash on hand.
Fuelling Evergrande fears, a multitude of other Hong Kong-listed property developers followed suit yesterday, entering trading halts of their own.