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- Evergrande recently paid off $83 million of interest in dollar bonds ahead of deadline.
- But payments like this are only a drop in the bucket of the company’s enormous, $300 billion debt load.
- If the company fails, China’s order of priority when it comes to managing defaults will be homebuyers first, creditors second, and existing shareholders last.
Evergrande, China’s second-biggest real-estate developer, is teetering on the brink of collapse, and Beijing appears unlikely to bail it out.
The giant recently managed to avoid default when it made an unexpected and last-minute $83.5 million bond-interest payment. But it’s facing several more upcoming bond payments on deadlines it’s already missed, and the size of its total debt – a whopping $300 billion – still looms large.
An Evergrande collapse stands to have global ripple effects. Insider’s Linette Lopez recently wrote that if China’s economy – which is propped up by its enormous, $52 trillion real-estate sector – collapses, the repercussions will be felt far and wide.
On a national level, if Evergrande collapses, the government will have three orders of priority when it comes to managing the fallout, Dr. Xin Sun, a senior lecturer in Chinese and East Asian Business at King’s College London, told Insider.
“The rank of priority for the government is definitely homebuyers first. The lowest level is the existing shareholders – they will be wiped out,” Sun said. “And in the middle are the creditors, who will negotiate the deal of how much of their loans have they recovered.”
First priority: Maintaining social stability
“The priority for the government in managing bankruptcies or defaults is always to ensure social stability and negotiate a deal with creditors,” if you examine the collapse of major Chinese companies in the past, Sun said.
To that end, Sun said, the government will prioritize homebuyers first. At the end of September, China’s central bank vowed to protect homebuyer interests, cooling investor fears that Evergrande’s issues would spread across financial markets.
Local governments will step in to deliver homes in Evergrande’s stead, Sun said.
“If Evergrande collapses, local governments will try to secure the remaining Evergrande assets in their own localities and ask other developers to take over the valuable assets,” Sun said. “They’ll borrow money from banks and continue to deliver homes to the previous buyers of Evergrande property.”
A large portion of China’s population falls into this category: More than 90% of households in China are homeowners, according to a January research paper on homeownership in China from the National Center for Biotechnology Information. The US, for comparison, has a 65% homeownership rate. And real estate accounts for a huge portion of citizens’ wealth. On average, 70% of Chinese households’ wealth is held in real estate.
Evergrande developments alone house more than 12 million people across 280 cities in China, its website says. It also has 1.6 million undelivered apartments – for which people have already put down deposits – hanging in the balance.
Second priority: Tending to lenders
The government’s second order of priority will be tending to lenders, Sun said, including international holders of Evergrande bonds, domestic banks, and suppliers Evergrande owes money to.
Among Evergrande’s main lenders is Shengjing Bank, but, as Matt Levine wrote for Bloomberg in September, the developer basically borrowed money from everyone.
“Evergrande got its financing from absolutely everyone – banks, investors, suppliers, customers, employees – and it seems unlikely that they all knew what they were getting into,” Levine wrote.
The Shenzhen-based developer also faces rapidly approaching end-of-year deadlines on more than $500 million owed to creditors.
“These people will face a negotiation phase,” Sun said. “Some of their loans to Evergrande might be recovered, but the ratio of their recovery is up for negotiation.”
Lowest priority: Shareholders
An Evergrande collapse will not come without suffering, Sun said.
“The people who suffer most will be the existing shareholders,” Sun said. “Their equity will be wiped out. About 70% of the shares belong to the founder’s family, and that will all be wiped out.”
Hui Ka Yan, the chairman and founder of Evergrande, has already seen a significant portion of his wealth wiped out this year. Hui has made $5.3 billion in dividends in the past four years, and his current net worth stands at $7.3 billion – a $16 billion decrease since the beginning of the year.
And there are more financial hurdles ahead for Hui. The Chinese government told Hui to use his personal wealth to pay off part of Evergrande’s enormous debt load, Bloomberg reported, citing people familiar with the matter.
After Hui’s family, the biggest Evergrande stakeholder is investment holding company Chinese Estates Holdings Ltd, which holds a 4.6% stake in the company. Major American investment firms, among them The Vanguard Group (.6%), Dimensional Fund Investors (.2%), and BlackRock Fund Advisors (.2%), also number among Evergrande’s stakeholders.
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