MNI (CORRECTED): Evergrande Highlights China Property Risks

(Corrects the amount of H1 developer bond defaults in paragraph 15)

Help will likely be at hand for China Evergrande Group as it moves to untangle a complex debt load of yuan and dollar bonds and commercial paper that has drawn the concern of the People's Bank of China as a company "too big to fail", policy advisors and market analysts told MNI.

Evergrande is the second-largest property developer by sales in China and the most indebted. Any repayment problems could raise risks of contagion in the financial sector, with the PBOC and other regulators, including local hot property markets such as Guangzhou, likely to step in if so.

"Local government financing vehicles, or state-owned large-scale developers in Guangzhou city may purchase shares or acquire some projects of Evergrande," said Lian Ping, chief economist at Zhixin Investment Research Institute.

A window of opportunity to deleverage is open this year, with local governments prepared to prevent and defuse fiscal and financial risks, especially leading developers' debt as "an important responsibility" of local party and government leaders outlined in a July meeting of China's Politburo, said Lian.

EVERGRANDE CALLED

Bond market eyebrows rose in mid-August after executives from Evergrande were called into the PBOC and issued a rare warning to reduce debt risks.

But the meeting also signaled positively that the government would not allow disorderly defaults, said Ming Ming, deputy research head of CITIC Securities and a former staffer at the PBOC.

According to Evergrande's semi-annual report, its interest-bearing debt stood at CNY571.8 billion at the end of June, down by about CNY300 billion from the peak last year, as it stepped up deleveraging efforts after regulators introduced caps on three debt ratios dubbed "the three red lines" policy.

Debt repayment concerns intensified after Evergrande admitted in June it did not pay some commercial paper on time and stepped-up selling assets, including its electric car unit.

Ming said the likely path forward is local governments coordinating with banks to restructure the company's maturing debts and asset sales to pare back the overall debt profile.

REPAYMENT PEAK

Evergrande's finances include an upcoming maturing March 23, 2022, USD2 billion 8.250% coupon bond which has fallen sharply this year by more than half of par value, according to Hong Kong-based Bondsupermart.

Last week, Moody's Investor Service changed its A1 China property developer outlook to negative from stable, with access to onshore bank and trust loans, and onshore and offshore bond markets expected to remain tight in the next six to 12 months.

Moody's uses funding as one of three indicators in addition to sales and inventory to assess the industry outlook.

Big developers like Evergrande have assets to sell, including property units, but face cash crunches at times as payments are due. While smaller developers may be under more pressure amid a peak of maturing debts this year, said Yan Yuejin, director of E-house China Research and Development Institution.

In the second half of 2021, developers face CNY406.57 billion of maturing corporate and puttable bonds domestically, as well as USD18.57 billion of maturing dollar bonds overseas, according to Ming.

About CNY30 billion of developers' bonds defaulted in H1, almost doubling the scale in H2 2020, and the real estate debt default rate soared to a record high of 1.79% from 0.82% in H2 2020, according to a report by Sinolink Securities.

Since 2021, bond defaults started to spread to large developers with annual sales exceeding CNY100 billion, including China Fortune Land Development and Sichuan Languang Development.

POLICY HEADWINDS

Both Lian and Ming pointed out that an expected looser credit environment and financing conditions in H2 should help ease a liquidity crunch.

Some property companies managed earlier this year to issue CNY135.3 billion of corporate bonds in June and July, a 29% increase y/y, Lian noted.

However, China has recently re-emphasized under social fairness policy that real estate speculation that widens income inequality is not welcome.

Regulations on the housing market would remain tight, including restrictions on the proportion of bank lending that can go to home buyers and property developers that were put in place earlier this year.

Though developers are counting on the upcoming holidays in September and October, the traditional peak sales period for homes, to lift capital turnover, homebuyers may also find it harder to obtain mortgage along with rising interest rates, as many banks already reached PBOC-mandated annual quotas on mortgages.

The housing market has been cooling in the past three months, with the sales areas of commercial housings in 30 large and medium-sized cities across the country fell by 27.4% y/y by mid-to-late August, the lowest in the past year and a half, according to Lian.

It is reported that some cities see mortgage interest rates as high as 6%, compared to the lending benchmark five-year loan prime rate (LPR) at 4.65%.

"More housing hotspots could see higher mortgage rates following further tightening," said Yan.