What analysts have to say about Evergrande as default risks rise By Reuters
HONG KONG (Reuters) – Worries about the fate of beleaguered developer China Evergrande Group have rattled markets around the world, and investors are looking for possible intervention by Beijing to stem any domino effects across the global economy.[L1N2QN02R]
Below are some key points from analysts’ comments about Evergrande Group, its cash-strapped business and the possible financial consequences for it. These comments were taken from research reports that were published last week.
“We think it is difficult for Evergrande to meet its liabilities. From a social stability perspective, project delivery is the most crucial. Therefore home buyers and suppliers are important stakeholders.
A possible scenario is “segregating project companies from the group to ensure the asset value is materialized and the cash flow is used for project construction only”
“We expect a debt restructuring with a haircut will be needed.”
“We estimate less than USD50bn of Evergrande’s USD300bn outstanding debt is financed by bank loans. … This suggests that the Chinese banking industry will be able to absorb bad debts.
“The contagion risk to supply chains (commodities), stability (construction workers and homebuyers) as well as credit stress (de-risking Chinese high yield bond), has become a major concern for investors over the last week. The Evergrande situation is being dealt with relatively lightly by the central government.
An Evergrande default and its effect on China’s banking sector presents “a potential systemic risk to China’s financial system” since approximately 41% of the banking system’s assets were either directly or indirectly associated with the property sector as of end-2020.
China’s Lehman-like moment is not the Evergrande crises. Policymakers are likely to prevent systemic risk, “to buy the time necessary for debt settlement” and promote marginal credit easing.
Restructuring Evergrande “will not be a simple task (as) Evergrande is not a simple corporate.”
There are complex aspects to the restructuring, including a bank that is a subsidiary Evergrande and a pharmaceutical company.
China’s authorities must examine how the bank is linked to other financial institutions in order to prevent a liquidity crisis in Shandong or among smaller banks.
S&P GLOBAL RATINGS
The Evergrande situation “could broadly rattle investors’ confidence in China’s property sector and, for speculative grade markets more broadly, possibly diminish funding access for unrelated names”
“Evergrande’s difficulties are also weighing on China’s property market. It could also have a wide-reaching impact on other developers, contractors and suppliers, as well as the financial institutions and banks that loan to them.
“What happens next comes down to how policymakers choose to handle the situation. Evergrande’s and other developers’ struggles are largely due to tightening restrictions, as authorities attempt to curb some past excesses within the property sector.
We believe that both bond and equity holders will experience further pain. However, the authorities will protect Evergrande’s homeowners, as well as other developers in trouble, to limit the damage to the economy.
BANK OF SINGAPORE
“While we would not be surprised by heightened volatility as the market grapples with uncertainty regarding the resolution of Evergrande’s situation, and as investors weigh the risks of government intervention coming in too late to contain widespread contagion effects, our base case is that the risk of an economic crisis in China due to Evergrande is limited at this time.”