The Evergrande Crisis in China
| Case Code: FINC197 Case Length: 16 Pages Period: 2020- 2021 Pub Date: 2022 Teaching Note: Available |
Price: Rs.400 Organization: Evergrande Group Industry: Real Estate Countries: China Themes: Corporate Finance, Capital Structure |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Origin of Evergrande
In 1996, Xu Jiayin (Jiayin) founded a company under the name ‘Hengda Group’ in Guangzhou, southern China, a special economic zone, where China initiated its urbanization with the help of entrepreneurs. Later, the name of the company was changed to ‘Evergrande’ Group. In the initial days, the company focused on building big apartments, taking loans to build at low costs, and then selling the apartments to upper and middle-income customers..
Beginning of the Crisis
In April 2020, with the easing of lockdown restrictions imposed to curb the spread of COVID-19, China observed a quick recovery in its property market. In May 2020, property sales in China increased to 9.7% as compared to a 2.1% fall in April 2020. The real estate sector was the first sector to show such improvement after the pandemic. Hayden Briscoe, Head of fixed income for Asia Pacific at UBS Asset Management..
Evergrande – A Part of the Crisis
In its expansionary move toward other business categories (like electric vehicles, sports, theme parks,), Evergrande had started borrowing more to fund its other projects. As a result, its liabilities had increased in 2014, and by 2020, they had reached US$ 302.61 billion..
How It Happened
The implementation of the TRL policy guidelines on Evergrande was started in May 2021 and it continued for the entire year..
Experts’ View
The story of Evergrande was similar to that of Lehman Brothers , which went bankrupt due to its high subprime mortgages. The assets of Evergrande were about 2% of China’s GDP. Many people including the new home buyers, materials suppliers, and construction and design firms had invested in the company. The company borrowed money from 171 domestic banks and 121 other financial firms. The company also had dues of US$ 7.4 billion in bond payments to foreign investors..
Way Forward
According to Evergrande, it was trying to settle the payment of domestic yuan bond through negotiations. For the settlement of dollar bonds, the company was expected to go in for a restructuring of the bonds or debt restructuring . Toward the end of September 2021, the company announced its plans to sell part of its stake in a local bank for around US$ 1.5 billion to raise more cash for the settlement of debts of Shengjing Bank..
Exhibit
Exhibit I: Income Statement of Evergrande Group
Exhibit II: Balance Sheet of Evergrande Group (From 2018-2020)
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