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China’s shadow debt scrutiny bites developers like Evergrande

(Bloomberg) – A tightening in the use of secret finance by Chinese developers threatens to dampen the growth of the world’s second-largest economy. For years, Chinese real estate developers have tapped into obscure capital pools to finance their projects. Now government control is curbing this system, having already curbed traditional funding methods. Debt-indebted developers, including China Evergrande Group, will likely have to reduce their growth and resort to other means such as equity financing and divesting more assets for funding in order to avoid defaults. suffer from debt bankruptcies, ”said John Sun, associate co-director at Aplus Partners Management Co, which focuses on private equity and credit investments. Weaker developers “will have to sell assets to fight for survival, while some will likely default on their debt.” The search for new funding adds pressure on cash-strapped developers nationwide, who already account for nearly 27% of the more than $ 20 billion in missed bond payments this year, according to data compiled by Bloomberg. According to the Chinese analyst of the Macquarie group, Larry Hu, the Chinese analyst of the Macquarie Group will slow down real estate investments and the pace of construction activities. According to Adrian Cheng, senior director of Asia-Pacific companies at Fitch Ratings, funding is often masked as equity offers of a debt-like nature. Another way is to provide guarantees to joint ventures or associates who borrow on behalf of developers, Cheng said. Funding from such guarantees for joint ventures accounted for about 9% of the total debt issued by Fitch-rated developers in the year. last, according to Fitch. Estimates, reaching a record 460 billion yuan ($ 71 billion). Offshore private debt It is outside of mainland China where the impact on developers has been most telling. One of the popular approaches over the past three years has been to use so-called orphan special-purpose vehicle structures to issue private debt, said Chen Yi, head of global financial markets at Haitong International Securities Group Ltd. debt is an orphan who is not a subsidiary or subsidiary of a company, therefore the debt will not appear on the company’s balance sheet Private debt issued by special orphan vehicles has decreased due to regulations more stringent such as the “Three Red Lines,” Chen said. These financing activities in the offshore market “peaked last year,” Chen said. “Developers have become more disciplined this year as rating agencies have asked borrowers for more transparency about their off-balance sheet borrowing, as have regulators.” Brewing issues This doesn’t mean that off-balance sheet funding will disappear, even if it will be used more sparingly and for more focused activities. For example, China’s centralized land bidding policy means that developers have to raise large sums of money in a short period of time to gain land. Companies that rely on joint ventures for financing might see this off-balance sheet debt represent up to 40%. Under the strict policies, some developers are already starting to crack. Chongqing Sincere Yuanchuang Industrial Co. has failed to repay three onshore bonds. They are following in the footsteps of China Fortune Land Development Co. and Tianjin Real Estate Group Co., each unable to meet payments of more than 10 billion yuan. Shares of the country’s top developers have lost 10% since authorities reported the restriction in August, causing turmoil for one of China’s biggest growth engines. Real estate contributes around 29% of China’s economic output if its broader influences are taken into account, according to joint research from Harvard University and Tsinghua University.The sector’s investment growth may be moderate at 4% from 7% last year, Hu said. A key measure of the pace of construction could drop 4% this year, he added. Faced with these headwinds, Chinese developers may need to rely on more equity and spinoff offerings to meet their funding obligations. Evergrande is taking some of the more aggressive steps, committing to listing an online sales platform and water utility, as well as planning a secondary listing of its onshore electric vehicle business in the goal of halving its $ 100 billion debt. Evergrande has raised about HK $ 10.6 billion by selling shares in its electric vehicle unit, a move that could help fix its balance sheet. Evergrande did not respond to email requests for comment. Chen, from Haiti, expects the offshore equity market to remain a bright spot for developers looking for funds. “We will continue to see more developers go public in Hong Kong this year with limited access to other funding channels,” he said. (Updates with changes from top Chinese developers) More stories like this are available on bloomberg.com ahead of time with the most trusted source of business news. © 2021 Bloomberg LP


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