Evergrande Closing Sales Showrooms May Add to Financial Pressure
2020-02-05 03:03:19.614 GMT
By Bloomberg News
(Bloomberg) -- An anticipated slowdown in home sales amid the spread of coronavirus may add to pressure on China's Evergrande Group, the nation’s most-indebted property developer. China’s third-largest home builder has halted showroom sales across the country until at least Feb. 20 to prevent the outbreak from escalating. That’s going to crimp cash inflows, at least temporarily, for a company whose interest payments average $28 million a day.
“If the downturn continues, that will add to the company’s refinancing pressures,” said Chuanyi Zhou, a credit analyst at Lucror Analytics Pte Ltd in Singapore. “Evergrande’s liquidity has been tight for a long time.” The firm had a cash-to-short-term-debt ratio of around 55% as of June, she said.
More than 100 cities across China have shuttered property-sales showrooms to help curb the spread of the sometimes-deadly coronavirus. While most developers are still offering apartments online, home sales are forecast to take a battering in the first quarter, already traditionally a slower time due to Lunar New Year. The most highly leveraged firms will bear the brunt of it because they count on income from sales to cope with potential cash crunches.
Evergrande didn’t immediately respond to a request for comment.
Evergrande’s suspension spans 1,040 showrooms, according to a notice seen by Bloomberg. It comes in the middle of what was meant to be a seven-week marketing blitz also ending Feb. 20 during which home buyers were being offered a 13% discount on apartments, along with other sweeteners.
Fortunately, a few things are going in Evergrande’s favor. February contracted sales have only accounted for an average 5.2% of full-year transactions in the past seven years, Bloomberg calculations based on company data show. With annual sales routinely topping 600 billion yuan ($86 billion),
Evergrande should be able to absorb one bad month, Zhou said. Evergrande also strengthened its capital buffer at an opportune time. Just as news of the coronavirus was beginning to seep out of China last month, the developer priced a mammoth $6 billion multitranch U.S. dollar bond sale.
“Evergrande seized the issuance window well ahead of Chinese New Year when sentiment remained strong,” Angus To, Hong Kong-based deputy head of research at ICBC International Holdings Ltd., said. “We believe the latest issuance alleviates part of the liquidity pressure for Evergrande and puts it in a better position to go through recent market turbulence.” Some of the bonds were purchased by Evergrande’s chairman and largest shareholder, Hui Ka Yan. Hui, also China’s third-richest person, snapped up $650 million of notes in total while Evergrande’s CEO Xia Haijun bought $100 million.
A Hong Kong exchange filing said the purchases were undertaken to “signify their support to and confidence in the group.”
ICBC’s To said it isn’t unusal for related parties of Evergrande to buy the bonds it issues.
“It happened last year too,” he said. “Their actions on one hand signal their optimistic view on the company and on the other, alleviate supply pressure on the market.”
To said founders and executives purchasing their own company’s debt was commonplace among Chinese high-yield issuers. It helps “send a positive signal to the market. The attractive yields are the reason behind it, and I don’t think it should raise alarm bells.”
On top of Evergrande’s large bond sale, the developer last month successfully postponed a potential $10 billion shareholder payment. A deadline extension until Jan. 31, 2021 was granted for when first and second-round investors in Evergrande’s yet-to-eventuate backdoor listing can demand a return of their money, equivalent to 24% of Evergrande’s cash.
“This will buy Evergrande more time to obtain approval for a China backdoor listing,” Bloomberg Intelligence analysts Kristy Hung and Patrick Wong said, noting the regulator’s tone on developers’ equity raisings had also turned more positive. Still, the ultimate decider for Evergrande in terms of the extent of the short-term pressure on its finances will be how long until the coronavirus comes under control.
With cases topping 24,000, deaths nearing 500 and the U.S. preparing for a possible pandemic, that date seems distant.
Evergrande on Sunday extended Lunar New Year holiday leave for its almost 130,000 employees to 25 days, ending Feb. 16. “Many developers count on steady cash flow as a liquidity lifeline,” S&P Global Ratings analyst Christopher Yip said. “For property firms, the key issue of the coronavirus crisis will not be its intensity, but its longevity.”
--With assistance from Pei Yi Mak and Lisa Zhou.