Asia’s Former Richest Man Faces Escalating Debt Crisis

Hui Ka Yan, a Chinese real estate mogul is quickly falling down the wealth ladder. His net worth fell another $3.35Billion this week as Evergrande shares tumbled 26%.

Analysts say that the once-resourceful businessman appears to have run out of options for avoiding a growing debt crisis. This is a shocking turn for Hui who was Asia’s richest man just four years back, with a net worth of $45.3 billion. His fortune is currently at $17.2 million and it’s not clear how much more.

He is currently trying to lower his debt load, which grew by 5% last year to 1.95 trillion Yuan ($301.6 million). Hui managed to save Evergrande from financial ruin in the past using a range of methods, including equity placements, debt sales and other means. But this time, Shen Chen of Shanghai Maoliang Investment Management says that things are different.

Shen states that Evergrande is experiencing a debt crisis which is “accelerating”. The company will run into trouble because it lacks access to financing and can’t sell assets quickly enough to raise money.

For example, investors are concerned that Evergrande might be cut off by financial institutions and require immediate repayments. A local court frozen deposits worth 132 million Yuan held by Evergrande’s mainland subsidiary, Hengda Real Estate Group. This was done at China Guangfa Bank’s request. Evergrande threatened to sue the bank because the loan is not due until March 2013.

Zhou Chuanyi is a credit analyst with Lucror Analytics in Singapore. He believes Guangfa’s actions are likely to have been prompted by growing concerns about Evergrande’s debt repayment ability. According to the company’s annual report, the company only had 158.8 million yuan cash and cash equivalents as of the end 2020, compared with 335.5 billion of outstanding borrowings for the following 12 months.

She says that banks will not sue Evergrande under normal circumstances. She says that creditors will become more anxious and will seek to protect their money. Markets are concerned about the possibility of financial institutions following suit.

Evergrande did not respond to email requests for comment. Hui has been facing tougher regulations and his borrowing options seem to be limited. China is tightening its regulations on trust financing. Fitch Ratings believes that it accounts for around 40% of company’s interest bearing debt. Evergrande cannot issue new bonds on the offshore market because it continues to violate China’s “three lines” policy. This was implemented last year in order to lessen the systemic risk from too much leverage in the property sector.

Although the company was able to raise HK$13.6billion ($1.75billion) to pay bonds due June and interest on any other notes in dollar, market relief was not long-lasting. Evergrande may be simply changing one type of debt to another, investors still have concerns. Last year, its trade and other payables (including commercial bills) grew by 13.5% to 829.2 trillion yuan.

Although technically they are not interest bearing debt, the bills allow Evergrande, after receiving goods and services, to make payments to suppliers at a fixed future date. Bill holders have less priority than bond and equity investors when it comes to claiming payments. Evergrande was in default on several commercial bills in the past before agreeing to repay the construction companies in June.

Zhou states that suppliers are less likely to pay Evergrande commercial bills right now. If the company is able to borrow money, they may choose to first pay their creditors.

Analysts believe that the billionaire could still make money by selling off properties and making non-core subsidiaries publicly. According to unaudited data, it collected cash of 321 billion Yuan from property sales in the first half. It listed in Hong Kong its property services unit last year and raised $1.8 billion.

Bloomberg reports that the company may now make Evergrande Spring, its Hong Kong bottled water business, public. Shen from Shanghai Maoliang says investors will not react well to financial difficulties at the parent company.

As examples of Evergrande’s future, he points out the HNA Group’s and Tsinghua Unigroup’s outcomes. After past credit-fueled purchases and bond defaults that did not boost their business, debt-laden companies are now looking at restructuring.

Lucror Analytics’s Zhou suggests that Suning, an electronics retailer could also be used as a guide. After losing control over the firm’s debt-strapped company, Zhang Jindong, its former chairman and billionaire, resigned. Suning received a $1.36 million bailout package from the state-led investors, who purchased a 16.96% share. Zhang was a Hui friend and once waived his rights to receive a payment of 20 billion Yuan from Evergrande.

She says, “Bringing in strategic investment is the best way to Evergrande.” Hui might not be ready to surrender control. “He may have to give up control bit by bit.”

Publited at Thu 22 July 2021, 02:34.13 (+0000).

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