Analysis: Creeping funding costs skew China Evergrande’s deleverage drive

In this news, we discuss the Analysis: Creeping funding costs skew China Evergrande’s deleverage drive.

HONG KONG / BEIJING (Reuters) – China Evergrande Group 3333.HK has set out to seek loans at above-average interest rates in the shadow banking market, where caution even on its largest debt .

The developer, who owed 835.5 billion yuan ($ 125 billion) at the end of June, was seeking liquidity from small banks and private trusts at high rates to fund the developments, as the limits proposed to the authorized size of real estate debt blocked enormously. bank loans.

At the same time, China’s second-largest developer by sales, after Country Garden Holdings Co Ltd 2007.HK, had to allay concerns about its cash flow after a document – which it called fake – showed that he had sought government support.

His situation is the culmination of a decade of bing developers on cheap debt, fueling a real estate boom. The company owns China’s largest land bank with 240 million square meters (59,305 acres) – the size of the Cook Islands – but is the most leveraged developer in the country’s most indebted sector.

As the government now tries to slow the rise in house prices and tighten the availability of mortgages – to limit household debt in a pandemic-stricken economy – the health of large, heavily indebted developers is making headlines. subject to increasingly close scrutiny.

“The main problem with Evergrande is the over-expansion and over-banking of too many different institutions,” said a risk control official at a large public bank, who was not authorized to speak to the media and therefore has refused to be identified.

In recent months, Evergrande has offered to issue debt with an annual interest of more than 15% privately to at least one onshore trust company and two offshore trust companies, said employees of the companies, who were also not allowed to speak to the media.

Trust companies pool money from high net worth individuals and businesses to make loans and are part of the informal, unregulated and opaque shadow banking system of China and Hong Kong.

The rates were higher than the average for teenagers in Hong Kong, where Evergrande offered debt last year, employees said.

Of the three trust companies, one offshore has already loaned money to Evergrande. This time, none did because of concerns about the developer’s high level of debt, employees said.

Shenzhen-based Evergrande did not respond to a request for comment.

Onshore, Evergrande has so far this year offered retail trust products at rates of 6.6% to 9%, little change from the same period last year, Reuters based calculations showed. on Usetrust.com data, which tracks the majority of trusted products.

This compared to the average cost of developer fundraising of 7.9%, down from 8.3% from a year earlier, the data showed, as base rates fall due to government policies aimed at mitigate the business impact of the COVID-19 pandemic.

DELAY IN CLEARANCE

Lenders and analysts have said that the risk of default or operational impact is relatively low for Evergrande given its multiple funding channels and extensive land bank. However, higher borrowing costs could hurt earnings and delay deleveraging.

The company pledged in March to reduce debt by 150 billion yuan per year over three years. Still, its fiat loans surged in the first half, with short-term debt rising 6% to 396 billion yuan, according to S&P Global Ratings. The credit rating firm last month lowered its outlook for Evergrande to negative.

In a retail product issued through AVIC Trust this month to raise up to 1.2 billion yuan for a residential project, Evergrande has offered 8.5% annual interest for 2 years. In comparison, the smaller par Seazen Holdings Co Ltd 601155.SS offered 7.5%.

Evergrande also pays higher rates in the onshore bond market. Last week, she sold 2 billion yuan of corporate bonds with a coupon of 5.8%. While the rate was the same as its September issue, it was above the benchmark rate of 4.02%.

“The only way out is to speed up real estate sales and get that much return on investment to ease the cash flow crunch,” said a project manager at Shanghai Trust Co. “Otherwise, an expected increase in costs of fundraising will only delay debt reduction efforts. “

Reporting by Clare Jim in Hong Kong and Zhang Yan in Beijing; Additional reporting by Cheng Leng in Beijing and Engen Tham in Shanghai; Editing by Sumeet Chatterjee and Christopher Cushing

Original © Thomson Reuters

Originally posted 2020-10-30 06:46:12.

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