Evergrande default is highly likely, S&P says

November 19, 2021: -On Thursday, highly indebted property developer China Evergrande will likely default because the company has essentially lost its primary business, S&P Global Rating analysts said in a report.

Evergrande was China’s second-largest developer by sales in the previous year. Like many Chinese developers, the company sold apartments to consumers before completion, which helped to generate capital for future projects.

But that cash flow cycle runs into problems. Despite the company’s ability to sell assets and find ways to make payments in time, “Evergrande’s massive debt will catch up with it,” the S&P report said.

“The firm is losing the capacity to sell new homes, meaning its main business model is effectively defunct. This makes full repayment of its debts unlikely,” the analysts said. “We still believe an Evergrande default is likely,” the report said.

While the developer has managed to stave off a default with last-minute payments, the analysts said Evergrande’s more extensive test would be when $3.5 billion comes due for U.S. dollar-denominated notes in March and April in the coming year.

Over the last decade, the value of Evergrande’s properties under construction has increased so quickly that it far exceeded the value of the company’s completed projects and what the company was able to sell. The People’s Bank of China is known as Evergrande, a unique case, and in October said most real estate developers were stable.

“We believe the government is willing to unwind Evergrande in a controlled fashion or an orderly debt restructuring take place,” the S&P analysts said on Thursday.

“Authorities want to maximize the number of presold homes. Evergrande completes to protect the interests of homebuyers, and for it to largely repay the contractors and other businesses supporting the firm.”

The real estate company has warned investors of default. The developer’s Hong Kong-listed shares decreased over 5% Thursday despite news it reached a deal to raise $273 million in an asset sale.