The Evergrande Blueprint Worked for Other Chinese Developers, Until It Didn’t
Nov. 28, 2021 5:30 am ET
China’s property boom has spawned numerous developers that, like industry giant
borrowed heavily to fund breakneck growth.
Now they are inflicting unprecedented losses on international investors as credit grows scarce and sales of new homes decline. Investors have dumped their bonds, setting off alarms over the companies’ finances.
While Evergrande so far has been able to cobble together funds to make last-minute bond payments, at least four developers have reneged on their dollar bonds since early October. Others are selling assets to raise cash.
The casualties could mount if the market for new bond sales doesn’t reopen soon, as hefty debts come due early next year. The average yield on U.S. dollar junk bonds of Chinese property developers in a broader ICE BofA index was nearly 30% at the end of October, reflecting investors’ extreme pessimism.
From a standing start in the late 1990s, the rapid growth of China’s private housing market created many ambitious, founder-led companies that sucked in capital and vacuumed up land, betting that home and land prices would keep rising. Industrywide annual revenue jumped to the equivalent of about $1.9 trillion, government statistics show, or about 26 times what it was in 2000.
There are now thousands of Chinese developers, and many of the larger ones have gone public. More than 100 trade on Hong Kong’s stock exchange, according to S&P Global Market Intelligence, where they have a combined market value of $242 billion.
The headquarters of Sinic Holdings in Shanghai.
“Evergrande has definitely pushed it further than most, but there are a lot of developers out there that share the same model,” said Andrew Lawrence of TS Lombard, a longtime property-sector analyst. “It’s been a massive boom and they’ve overtraded in order to get bigger.”
Sinic Holdings Group Co. stands out for the speed of its rise and fall. Sinic, meaning “new power” in Chinese, was started in 2010 by Zhang Yuanlin, a former construction company manager. It focused initially on the inland province of Jiangxi, then quickly expanded into eastern coastal cities and western metropolises.
By 2019, the year the company went public in Hong Kong, its revenue was equivalent to $4.8 billion. Shortly after, Sinic obtained credit ratings and by January of this year it had sold three sets of dollar bonds totaling $710 million.
By September, Sinic was in trouble, as Beijing’s “three red lines” policies curbing developers’ leverage pressed down on the industry. Its bond prices nosedived, and its stock cratered 87% in one day, as a forced sale of some of Mr. Zhang’s shares unfolded. In October it failed to repay $250 million in bonds.
The headquarters of Fantasia Holdings in Shenzhen.
Sinic was among China’s more ambitious developers, but wasn’t uniquely so, and was a victim of rapidly changing circumstances, said an investor at a global asset manager that had bought Sinic securities.
The global bond markets are where investors feel the industry’s abrupt downturn most keenly. But offshore bonds were just one of numerous funding sources for developers. Overall borrowings topped $5 trillion as of June, Nomura economists estimate.
The recent defaulters also include Beijing-based Modern Land (China) Co., which focuses on green projects, and Shenzhen-based
, a high-end developer majority owned by the niece of a former Chinese vice president.
Stresses have been building for some time, with companies such as industrial-parks specialist China Fortune Land Development Co. defaulting earlier this year. It had about $4.6 billion of international bonds outstanding.
A China Fortune Land Development project in the Hebei province city of Zhuozhou earlier this year.
Although the sudden crunch in sales and credit has exposed the fragility of many developers’ business models, analysts and investors say they were merely part of a bigger system.
As developers leveraged up, bankers eagerly pushed deals and investors eagerly lent at high interest rates, causing financial risks to build up over the past decade, said Gordon Ip, the chief investment officer for fixed income at
in Hong Kong.
Local governments, meanwhile, eagerly sold land. Last year their sales generated 8.4 trillion yuan, equivalent to $1.31 trillion–nearly 31% of local-government revenue, according to Nomura.
“It was an ecosystem that worked for everybody,” said Travis Lundy, an analyst in Hong Kong who publishes on the Smartkarma research platform. “It’s a very complicated machine, with a lot of operators applying grease to the wheels of the machine. The developers are not blameless, but they are simply part of the machine.”
The trajectory of Shenzhen-based
Kaisa Group Holdings Ltd.
shows how ready global investors have been to extend credit even to companies with checkered recent pasts.
Kaisa ran into trouble in late 2014, after authorities in its home city blocked sales at some of its properties, and it defaulted the following year–at a time when offshore defaults by Chinese corporate borrowers were almost unheard of. Kaisa later agreed to a workout that swapped existing debt for some $3 billion of new offshore bonds with longer maturities.
The company’s shares resumed trading in 2017 after a two-year halt and Kaisa rapidly regained access to global bond markets. In 2019, it was able to issue $3 billion of new dollar debt, and it sold even more the following year.
Kaisa recently fell behind on some bond-interest payments, and is pushing investors to swap $400 million of debt due in early December for new bonds that don’t mature for a further 18 months.
Kaisa’s credit ratings have been lowered deeper into junk territory and its bonds have plunged: A 9.375% bond due in 2024 recently bid at 31.6 cents on the dollar, according to Tradeweb.
Other developers, such as Yango Group Co., have already pushed through debt swaps, a maneuver that global credit raters often regard as a form of default.
As for Evergrande, its situation is far from resolved. Its dollar debt coming due over the next six months exceeds $3.5 billion–many times the sum of the payments it has managed to make since it missed its first coupons in September. Its overall liabilities total some $300 billion.
“We still believe an Evergrande default is highly likely,” S&P Global Ratings said in a Nov. 18 report, with the company’s difficulty selling new homes rendering its main business model “effectively defunct.”
From the Archives
Evergrande, China’s most indebted property developer, has kept global markets on edge and sparked protests at home as it struggles to survive. WSJ explains why the company’s crisis is raising questions about the state of the world’s second-largest economy. Photo: Alex Plavevski/Shutterstock
–Anniek Bao and Frances Yoon contributed to this article.
Write to Quentin Webb at [email protected]
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Appeared in the November 29, 2021, print edition as ‘Chinese Developers Face Losses After Using Evergrande’s Playbook.’