China’s second-largest developer, Evergrande Real Estate Group, claimed it can meet obligations with no problems despite Standard & Poor’s saying the company is now vulnerable to non-payment after debt doubled during the past 12 months, Bloomberg reported.
According to Bloomberg-compiled data, the developer is now the most indebted of the 198 listed real estate firms in China. Jimmy Fong, an investor relations official at Evergrande, told the website that it will meet its near-term obligations after a property market pickup had improved liquidity. However, there is still a 6.2 percent probability that Evergrande will miss payments during the next year, according to Bloomberg’s Default Risk model. The model tracks metrics including share performance, liabilities and cash flow.
“Default risk has risen as Evergrande leverages up aggressively to speed up construction and land acquisition as well as expansion into non-property related businesses,” Tony Chen, a credit analyst at Nomura Holdings Inc. explained. “Refinancing needs are very heavy.”
There was a massive 90 percent jump in total debt at Evergrande in 2015 and Bloomberg reported that this total was 15 times what the company earned before interest, taxes, depreciation and amortization. This number happens to be more than double the industry median of 6.6 times. Bloomberg’s data also revealed that the Chinese developer had CNY159 billion of obligations due before the end of 2016 and CNY54.8 billion the year after that.
That led to Standard & Poor’s cutting Evergrande’s unsecured bond rating to CCC+ in April. This rating means it is vulnerable to nonpayment and dependent on favorable business conditions. Moody’s Investors Service also had concerns about the company, detailing in a report that the debt-fueled expansion has weakened the developers’ credit quality despite the pickup in property sales improving liquidity.
“We have CYN164 billion of cash on hand at the end of 2015 and we achieved CNY67 billion of contracted sales in the first quarter this year, which will reduce leverage,” Fong told Bloomberg. “Most of the debt due this year can be easily be rolled over.”
