Business

How China handled 3 high-profile corporate meltdowns, including companies considered too big to fail — and what that could tell us about Evergrande’s future

Evergrande skyscraper
Evergrande headquarters in Shenzhen, China .

  • Chinese property giant Evergrande is teetering on the brink of collapse, with $300 billion in debt.
  • The Chinese government is likely to step in to manage the company’s unraveling, experts say.
  • Authorities previously stepped in to manage meltdowns at Anbang Insurance, Baoshang Bank, and HNA Group.

China Evergrande’s debt crisis has investors on edge.

If the property developer defaults, it could send the world’s second-largest economy — and the rest of the world — into a financial crisis. But experts say the Chinese government is likely to step in to manage the situation, in the shadows or otherwise.

“Evergrande is too big for the Chinese government to ignore,” Warut Promboon, head of credit research at research firm Bondcritic, wrote in a note published last month on the Smartkarma research platform.

To get a sense of how the rest of Evergrande’s debt drama could play out, we took a look at how the Chinese Community Party has managed the collapse of three too-big-to fail private companies in the last five years.

Anbang got absorbed into a new entity set up by the government — which is still trying to sell it off

Company: Anbang

Sector: Car insurance turned conglomerate

At its peak: Anbang started as a regional car insurer in 2004 but — thanks to an aggressive debt-fueled shopping spree — grew so much in a decade that it managed to snap up the storied Waldorf Astoria hotel in New York for about $2 billion in 2014.

It was well-connected, too. Founder Wu Xiaohui was married to a granddaughter of late Chinese leader Deng Xiaoping, who is credited with reforming China’s economy. By 2018, Anbang claimed to have about two trillion Chinese yuan ($313 billion) in assets, Reuters reported.

The collapse: Anbang’s downfall was swift and sudden. Wu was taken away by the police from his office in 2017. The next year, he was sentenced to 18 years in jail for suspected economic crimes, including fundraising, fraud, and embezzlement.

The government’s intervention: By the time Wu was sentenced, Chinese regulators had already taken over Anbang and started a state-led restructuring of the technically insolvent insurer.

As part of its restructuring, Anbang’s core insurance and asset management businesses were transferred to a new state-owned company, Dajia, in 2019. Some other assets were sold off to raise cash.

Last year, the Chinese insurance regulator ended its two-year takeover. During the time it was in charge, the troubled insurer managed to pay short- and medium-term financial insurance issued on time with no defaults, said China’s insurance regulator.

The Chinese government is now trying to sell its stakes in Dajia, which two state investors put up for auction in July. It hasn’t found a buyer yet, and for what it’s worth, it’s holding onto the Waldorf Astoria.

Baoshang Bank underwent a government-managed restructuring and repaid most debts before it was allowed to go bankrupt

Company: Baoshang Bank

Sector: Finance

At its peak: Baoshang was a small, obscure Chinese bank based in Inner Mongolia with conglomerate Tomorrow Group as its major shareholder. The bank had assets of 576 billion Chinese yuan ($90 billion) in 2017, when it published its last annual report.

The collapse: In May 2019, the Chinese government took over the small lender suddenly, citing serious credit risks. It was China’s first state bank seizure in more than two decades, and the move sent shockwaves across the country’s banking system. Regulators said Tomorrow Group had made improper and illegal use of significant bank funds.

The government’s intervention: While Baoshang was a far smaller company than Evergrande or Anbang, the troubles at Baoshang ignited global concerns about bad loans at small lenders in China, the systemic risks in hundreds of such lenders in the country, and the domino effect of a financial crisis from the world’s second-largest economy.

Under a government-led restructuring, parts of Baoshang Bank’s assets, liabilities, and businesses were taken over by a newly formed bank — Mengshang Bank — and Hong Kong-listed Huishang Bank.

State investors such as a national deposit insurance fund and the Inner Mongolia government entered the restructuring process, injecting funds into the new entity through a facility that provided liquidity.

This allowed 90% of debts owed to large creditors to be repaid, Reuters reported, citing the People’s Bank of China. Without the injection of public funds, the average repayment rate for creditors would be less than 60%, according to the central bank.

In August 2020, Baoshang was finally allowed to file for bankruptcy and to liquidate its remaining assets. The new Mengshang Bank is still operating.

HNA Group asked for help and got taken over by the government

Company: HNA Group

Sector: Starting out as an airline in 1993 in the southern China region of Hainan, HNA Group grew to become an aggressive dealmaker snapping up trophy businesses around the world using ultra-loose credit available in the 2010s. At the end of June 2017, HNA had assets of 1.2 trillion Chinese yuan ($187.7 billion.)

At its peak: Its global acquisitions — worth more than $50 billion, according to Reuters — included sizable stakes in Hilton Hotels and Deutsche Bank, as well as luxury properties including skyscraper 245 Park Avenue in Manhattan. Many of its acquisitions were made at a high premium, according to Dealogic in a note.

At its peak, HNA employed 400,000 people around the world, according to The New York Times.

The collapse: HNA’s debt-fueled acquisitions started to come under the microscope of the Chinese government. Its unravelling came in a similar fashion to Evergrande’s — by way of government measures introduced in 2017 that aimed to minimize private domestic companies’ risk exposure.

The government’s intervention: HNA came under regulatory scrutiny and banks that once dealt with its investments halted loans to the group, causing a massive liquidity crunch, in turn hitting HNA’s ability to pay off its debts. It started selling assets to raise funds, including stakes in Hilton and Deutsche Bank. 

Foreign governments, including the US, also scrutinized deals the company was making, citing concerns like national security.

HNA started selling off most of its assets unrelated to its original businesses, saying in 2018 it would focus on aviation, logistics, and tourism — but the pandemic hit last year, impacting those sectors. This prompted HNA to seek help from the Hainan provincial government, which took over the company. Officials from China’s civil aviation administrator and China Development Bank, the country’s main policy bank, also got involved.

HNA was placed in bankruptcy administration in February 2021 and just last month, creditors of the company voted to approve the company’s restructuring plan involving 1.1 trillion Chinese yuan ($172 billion) worth of debt.

It has also been broken into four independent units focusing on aviation, airport, financial, and commercial.

Evergrande will likely go the way of HNA Group, says a bond specialist

Evergrande, China’s second-biggest property developer, has $300 billion in debt. The Chinese government is likely to manage a controlled implosion of the company, keeping the fallout as minimal as possible, said Warut. Stakeholders have few options.

The political system in China empowers regulators with “heavy hands which will force collaborations among issuers, investors, and intermediaries” who are often owned or influenced by the government, he said.

Chinese officials have sought to calm nerves about the debt crisis. They have publicly chided Evergrande, telling the company to resolve its debt problems and instructing the country’s real-estate developers to pay their overseas bondholders.

Evergrande will likely go the way of HNA, having to sell down assets and managing risks step by step, eventually resulting in “a smaller Evergrande,” Warut told Insider. Going by precedence, the entire process is likely to be long-drawn and may take years, he added.

Authorities have already asked government-owned firms and state-backed property developers to buy some of Evergrande’s assets, Reuters reported.

It has also dropped instructions to Evergrande to contain the fallout. Bloomberg, citing people familiar with the matter, reported that Beijing has told Evergrande’s billionaire founder, Hui Ka Yan, to use his own money to pay the company’s debt. He seems to be complying with the directive, reportedly pumping in $1.1 billion from fire sales of assets including art and two Hong Kong apartments to pay down some of the debt.

Read the original article on Business Insider

Powered by WPeMatico

Click to comment

You must be logged in to post a comment Login

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Most Popular

To Top