- Evergrande default risk surged to 6.2 percent: Bloomberg Model
- Company's `refinancing needs are very heavy,' Nomura says
China’s second-largest developer says it can easily meet obligations after Standard & Poor’s said a doubling in debt last year left it vulnerable to non-payment.
Evergrande Real Estate Group Ltd. has become the most indebted of 198 listed Chinese real estate firms, Bloomberg-compiled data show. Jimmy Fong, investor relations official, said on Thursday a property market pickup had improved liquidity and it could meet near-term obligations. There is a 6.2 percent probability it will miss payments in the next 12 months, up from 1 percent a year ago, according to the Bloomberg Default Risk model that tracks metrics including share performance, liabilities and cash flow. That’s second only to Greenland Holdings Corp., the No. 3 developer by revenue.
“Default risk has risen as Evergrande leverages up aggressively to speed up construction and land acquisition as well as expansion into non-property related businesses,” said Tony Chen, credit analyst at Nomura Holdings Inc. in Hong Kong. “Refinancing needs are very heavy.”
Evergrande’s total debt climbed 90 percent to 297 billion yuan ($45.8 billion) in 2015, which at 15 times earnings before interest, taxes, depreciation and amortization is more than twice the industry median of 6.6 times, Bloomberg-compiled data show. As of Dec. 31, it had 159 billion yuan of obligations due in one year and 54.8 billion yuan due the following year, according to the data.
Standard & Poor’s cut its unsecured bond rating this month to CCC+, which means it is vulnerable to nonpayment and dependent on favorable business conditions. Moody’s Investors Service, which lowered the Guangzhou-based company’s notes to a ‘high-risk’ rank of B3 in January, said in a report Thursday that debt-fueled expansion means developers’ credit quality remains weak even as the pickup in property sales improves liquidity.
“We have 164 billion yuan of cash on hand at the end of 2015 and we achieved 67 billion yuan of contracted sales in the first quarter this year, which will reduce leverage,” Evergrande’s Fong said over the phone. Most of the debt due this year "can be easily be rolled over,” he said.
Evergrande’s leverage increased due to higher payments for land purchases and investments in industries other than property, a spokesperson who declined to be identified said in an e-mailed response. The spokesperson said the developer will reduce capital expenditure and improve leverage, contracted sales and cash collection.
Evergrande spent about $8.1 billion on acquisitions last year, up from $1.33 billion in 2014, Bloomberg-compiled data show. Its spending spree has extended beyond core property assets. In February, it paid HK$3.89 billion ($500 million) for a 5.6 percent stake in Shengjing Bank Co., after buying Mass Mutual Tower in Hong Kong last year for HK$12.5 billion.
“With relatively easy credit and more aggressive land expansion plans among the Chinese developers, default risk is definitely on the rise,” said Yin Chin Cheong, credit analyst at CreditSights Inc. in Singapore.
Regulators have opened up the local bond market to developers and loosened mortgage restrictions to help revive the economy. Home-price gains accelerated last month even as those in third-tier cities remained “relatively stable,” the statistics bureau said. Evergrande’s Fong said first- and second-tier cities accounted for 62 percent of its sales in 2015.
Debt for the sector overall soared 41 percent in the past year, the Bloomberg data show. Investors should “be selective in the property market and stick to large, diversified developers,” Raja Mukherji, Hong Kong-based head of Asian credit research at Pacific Investment Management Co., wrote in a Thursday research note.
"China’s property sector has been a bastion of idiosyncratic risk for bondholders," he wrote. "Without experiencing much cyclicality in the past and being strong believers of ‘too big to fail,’ most players in this sector focused on scaling up."
While Evergrande’s $1.5 billion 8.75 percent 2018 notes have slid 2.9 cents on the dollar this year to 98.4 cents, they are still up 5.7 cents in the past 12 months.
Some regions are starting to curb their property markets to prevent overheating. The Eastern city of Nanjing is considering an 8 percent to 12 percent annual limit on home- price increases, 21st Century Business Herald reported, without citing anyone.
“Its dollar bonds are supported by Chinese money for the yield pick-up over its onshore notes, and to some extent, a ‘too-big-to-fail’ assumption,” Chen of Nomura said.