Evergrande May Have Become Too Big to Fail, CreditSights Says

  • Research provider maintains market-perform rating on bonds
  • A default could wreak bank havoc, cause social unrest

The Guangzhou skyline.

Photographer: ChinaFotoPress/Getty Images

Evergrande Real Estate Group Ltd., the Chinese developer that’s been on a debt-fueled buying spree in the past year, may be too big to fail, according to research firm CreditSights.

A default by Evergrande, China’s largest developer by assets, could "wreak havoc among the banks and cause social unrest among its employees and customers," Singapore-based CreditSights said in an April 13 report.

“From a fundamental standpoint, we remain wary of the developer’s high leverage and shareholder-friendly strategies,” according to the report. “However, the company has grown so large that it may be too big to fail,” CreditSights said, explaining its decision to maintain a market-perform recommendation on the company’s series of bonds.

The report, written after analysts met with company executives including Chief Financial Officer Parry Tse, noted that Evergrande’s management justified its aggressive spending on land acquisitions and construction costs, more than originally planned. According to CreditSights, Evergrande executives said the acquisitions were driven by an urge to capture China’s property market recovery.

Evergrande said it plans to deleverage going forward and projects a small cash deficit of 1.8 billion yuan ($280 million) this year, according to the report. The developer has no plans to sell offshore bonds as onshore funding is cheaper.

Evergrande’s spending spree has extended beyond core property assets in China. 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, the most ever paid for a commercial building in the city.

Jimmy Fong, Evergrande’s investor relations manager in Hong Kong, didn’t answer a phone call or an e-mail seeking comment.

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