Debt Crisis of Evergrande

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It’s likely that you have already heard that there is a crisis going on with the China’s one of the largest company, Evergrande. In this blog, you will find about the current situation of their debt crisis.

So what is Evergrande? Evergrande Real Estate Group is the second-largest property developer (owns more than 1,300 building projects) in China by sales founded in 1996 by Xu Jiayin. The Group owns 565 million square meters of development land and real estate projects in more than 280 cities.

In 2010, the company bought one of the largest football team, Guangzhou FC. They invested heavy amounts for the team to retain and bring the top and finest players into the Team. Not only that, The company built the largest football school in April 2020 which costed them $185 Million.

In 2014, Evergrande Group launched its mineral water brand, Evergrande Spring with an investment of ¥5.54 billion. But unfortunately, in September 2016, after a loss of ¥4 billion, Evergrande sold its agribusiness units, which included its mineral water brand, dairy business, and grain and oil business, for ¥2.7 billion.

In March 2015, Evergrande acquired New Media Group Holdings and renamed it Evergrande Health. Evergrande Health Group operates “Evergrande Health Valley”, a health and wellness park, and retirement community.

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In November 2015, Evergrande acquired a 50% stake in Sino-Singapore Great Eastern Life Insurance Company for $617 million and changed its name to Evergrande Life. Evergrande has also sold wealth management products to consumers.

In 2018, Evergrande acquired a 45% stake in electric vehicle company Faraday Future for $2 billion through its Evergrande Health subsidiary.

In November 2019, Evergrande announced that it would invest ¥45 billion over the following three years to develop new energy vehicles and launch electric vehicles branded as “Evergrande New Energy Vehicle” in 2020

In June 2020, Evergrande Group acquired the remaining 49% of NEVS (a Swedish electric car manufacturer) for $380 million, after having acquired 51% of the shares for $931 million in 2019.

In short, Evergrande did business in Real Estate, Finance, Automobile, Agriculture, Sports, Entertainment. The company aggressively expanded in the last few years by leveraging which now hit them back where they are struggling to pay their lenders.

Evergrande is in a debt crisis with a debt pile of around $300 billion. They have a grace period of up to 30 days on an interest payment of nearly $84 million that was due Thursday. Evergrande had offered its properties at a discounted rate to ensure enough liquidity still they are struggling to sell as the people are skeptical about the inflated real estate market and do not want to purchase. The situation got so much worse that Evergrande also stopped paying its employees. Not paying the employees only happens when there is a serious financial problem in the company and Evergrande is facing one.

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Evergrande owes money to about 171 domestic banks and 121 other financial firms. Therefore, if the company defaults then huge pressure could be created on banks and financial firms and could affect the economy of China. Real estate and related industries account for approx. 30% of the GDP which makes us sure that the impact might be huge in case of default. Also, it’s not only Evergrande who is facing such problems, there are many other developers who are facing the debt crisis and are in a difficult position to repay their liabilities. Possible ways of what might happen next: Restructuring of loans might happen to save the company, can segregate their assets and projects to different companies or a government bailout. If the government came into the picture of bailout then maybe other debt crisis companies will start defaulting. It won’t be easy to tackle this crisis and many analysts gave this crisis a name of second Lehman Brothers. But I think that this crisis won’t turn out to be as big as 2008 but you never know. Let’s see what happens next.

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Meet Mehta

21 | Small & Mid Cap Investor | CFA L1 candidate | Blogger | Reader | Engineer | Life-Long Learner
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