A huge bank loan is behind Evergrande Real Estate’s liquidity squeeze

Locked out of credit, Evergrande Real Estate Group Inc. resorted to home-price cuts and targeted asset sales to overcome a liquidity crisis that could worsen if interest rates rise and property values fall. After…

A huge bank loan is behind Evergrande Real Estate’s liquidity squeeze

Locked out of credit, Evergrande Real Estate Group Inc. resorted to home-price cuts and targeted asset sales to overcome a liquidity crisis that could worsen if interest rates rise and property values fall.

After more than two decades of double-digit annual home-price growth, China’s biggest homebuilder — at more than $70 billion the country’s fourth-largest developer by market value — faces a cash crunch after sales failed to keep pace with debt payments.

“Home sales are so slow right now,” said Ma Xiaoping, an analyst at East Capital Securities Co. in Beijing. “Property prices are sliding and investors are withdrawing their funds.”

Evergrande Group Co.’s stock has lost more than half its value this year.

Evergrande, part-owned by billionaire Yang Rongshan, counts the government of the southwestern province of Chongqing among its top five investors. The loan pile has emerged as a major hurdle for Evergrande amid government-led efforts to cut off liquidity to boost China’s cooling real estate market.

Months of tightening measures and curbs on bank lending to developers have begun to bite, with home prices falling 3.1 percent in May from a year earlier in the largest cities as tighter curbs meant to curb property speculation increase supply, the China Real Estate Information Corp. said Thursday.

The Beijing-based company reported in April that its fundraising woes were eased after it arranged a one-year $7.2 billion credit line that didn’t require foreign investors to provide a credit line. Evergrande was founded by its current chairman, Pong Quang Hong, in the late 1980s with a $100 million loan from his father.

The company is now battling another land and land-margin squeeze that could make financing even harder to secure.

Evergrande’s debt-to-equity ratio was 28.4 percent as of March 31, the most in the sector, according to data compiled by Bloomberg. New mortgage loans to developers declined by 21 percent year-on-year in the first quarter. Evergrande disclosed in May it had repaid 4 billion yuan ($660 million) of unsecured promissory notes in April without specifying the source of funds. The company isn’t looking to sell assets now and is looking to refinance with a smaller credit facility, Ma said.

A plan announced Tuesday to partially sell residential land in the southern city of Wuxi to Shenzhen-based Huishan Real Estate Group Co. won’t result in huge sales or earnings this year, Evergrande Chairman Pong said last week in an interview with reporters in the city. “We are at the end of our leverage leveraged,” he said.

Evergrande said in April it is selling certain non-strategic assets in several overseas markets such as Indonesia to focus on Singapore, and more of these kinds of sales will follow, Pong said.

The reduction of Evergrande’s debt is an “important step” to alleviate its leverage, Hao Hong, Hong Kong-based chief investment officer at Bocom International Holdings Co., said in a note. “We do not anticipate the firm will need to tap the loan market anytime soon. However, it is hard to say if this will be sustainable in the long term or if Evergrande will need to raise new financing in the future.”

Evergrande’s shares rose 0.9 percent in Hong Kong trading to $5.10, adding to the previous session’s gain of 2.8 percent.

Leave a Comment