Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Either the foreign creditors of Chinese developer Evergrande Real Estate aren't reading ratings reports these days, or they got some good news that Standard & Poor's didn't. 

The ratings agency downgraded Evergrande's dollar-denominated bonds to CCC+ and kept their outlook at negative late Friday, bringing the notes to a level associated with debt that's just about to default, or in S&P's own language, ``currently vulnerable to non-payment.''

The move did hurt the company's $1.5 billion of 2018 bonds -- on Monday they fell 2.1 cents on the dollar to 99.5 cents. If you're thinking that doesn't sound very low, it's because it's not. Evergrande's debt is still trading near par, or 100 cents on the dollar, a level more associated with AAA notes. C-rated securities tracked by a JPMorgan Asian credit index yield an average 19.6 percent, more than double the 9 percent Evergrande's notes are paying.

Since S&P first put Evergrande on credit watch negative on Jan. 27, 2014, its bonds haven't traded lower than 87.3 cents, according to prices compiled by Bloomberg, and were at a record-high 102.2 cents as recently as January.

Spot the Mistake
In spite of some jolts prompted by downgrades, investors keep buying Evergrande's bonds
Source: Bloomberg

Meantime, the company's debt has swelled to $45.8 billion from $24.5 billion:

More Debt? No Problem
Evergrande's debt has risen almost sixfold since June 2011
Source: Bloomberg

Leverage has ballooned as well, with the ratio of net debt to operational earnings soaring to almost 10 times. For most companies, creditor alarm bells usually start ringing when that measure breaches five times.

It would take 10 years of operational earnings for Evergrande to clear its net debt
Source: Bloomberg

Explaining the rationale for its most recent move, S&P said ``we anticipate that the liquidity of the China-based property developer will tighten because of its large short-term debt maturities and heightened refinancing risk.''

So what are creditors seeing that S&P's not? Perhaps one of the reasons S&P gave for the downgrade is exactly what's enticing bond buyers: ``Over the past three years, the company has been expanding through ad-hoc mergers and acquisitions,'' it said. Those include a stake in an insurance company, and a football team.

Maybe investors see some method to Evergrande's deal madness. By taking over China's champion football club Guangzhou Evergrande Taobao, Chairman Hui Ka Yan was not only investing in a spot of marketing for his company but also probably earning a soft spot in the heart of China's football-crazy president, Xi Jinping. Purchasing part of an insurance business could provide Evergrande with a source of even more leverage, considering how much debt the nation's insurers have taken on to buy everything from financial institutions in Portugal to property in London. 

There may be subjective reasons to give Evergrande the benefit of the doubt, even as its own leverage gets out of all proportion. More likely, though, S&P has a good point, and one that offshore creditors should heed.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at

To contact the editor responsible for this story:
Katrina Nicholas at