Asia’s Former Richest Man Faces Escalating Debt Crisis

Chinese real estate tycoon Hui Ka Yan is rapidly slipping down the wealth rankings. He net worth dropped another $3.35 billion this week, as shares of his Evergrande tumbled 26%.

The company’s Hong Kong-listed shares have plunged 68% over the past year, and analysts say the once resourceful tycoon appears to be running out of options to avert a mounting debt crisis. It’s a dramatic turn of events for Hui, who had been crowned Asia’s richest person just four years ago, when his net worth peaked at $45.3 billion. Today, his fortune currently sits at $17.2 billion and there’s no telling how much further it may drop.

The embattled tycoon is struggling to reduce a total debt pile that grew another 5% to reach a whopping 1.95 trillion yuan ($301.6 billion) as of last year. Hui has actually managed to steer Evergrande out of trouble in the past through a variety of different means, such as equity placements and debt sales, but this time is different, according to Shen Chen, a partner at Shanghai Maoliang Investment Management.

“Evergrande’s debt crisis is accelerating,” Shen says. “The company is sure to run into problems because it doesn’t have access to new financing, and it can’t dispose of assets in a fast enough manner to raise funds either.”

Investors, for example, worry that financial institutions might cut off Evergrande’s funding and demand immediate repayments. Last week, a local court froze 132 million yuan of deposits held by Evergrande’s mainland subsidiary, Hengda Real Estate Group, at the request of creditor China Guangfa Bank. Evergrande threatened legal action against the bank, because the loan in question won’t be due until March next year.

Zhou Chuanyi, a credit analyst at Singapore-based Lucror Analytics, says Guangfa’s action is likely to be prompted by mounting worries over Evergrande’s ability to meet its debt obligations. The company had only 158.8 billion yuan in cash and cash equivalents at the end of 2020, against 335.5 billion yuan of borrowings that were due in the next 12 months, according to its annual report.

“Under normal circumstances banks won’t go so far as to sue Evergrande,” she says. “But as creditors grow increasingly anxious, they will want to protect their money, and markets are worried that more financial institutions will follow suit.”

Evergrande didn’t respond to emailed requests for comment. In the meantime, Hui is facing a tougher regulatory environment and finding his other borrowing options appear to be running out. Trust financing, which Fitch Ratings estimates accounts for about 40% of the company’s interest-bearing debt, is being drastically tightened in China. And as a company that remains in breach of the country’s “three red lines” policy, which was introduced last year to reduce the systemic risk of too much leverage building up in the property sector, Evergrande can’t issue any new bonds in the offshore market this year.

The company managed to use its own funds to arrange a HK$13.6 billion ($1.75 billion) payment for bonds due in June, as well as interest payments on all other dollar-denominated notes, but market relief was short lived. Investors still worry that Evergrande is simply swapping one form of debt for another. Its trade and other payables, including commercial bills, grew 13.5% to 829.2 billion yuan last year.

The bills, technically not classified as interest-bearing debt, allow Evergrande to pay suppliers on a future fixed date after already receiving goods or services. Compared with bond or equity investors, bill holders usually have a lower priority in claiming their payments. Evergrande had defaulted on commercial bills several times in the past, before finally agreeing to pay the construction companies in June.

“Suppliers are a lot less willing to accept Evergrande’s commercial bills now,” Zhou says. “When the company has money on its hands, it may simply opt to pay other creditors first.”

Analysts say the billionaire can still raise funds by selling properties at a discount, and taking non-core subsidiaries public. It collected 321 billion yuan of cash from property sales during the first half, according to unaudited results. Last year, it listed its property services unit in Hong Kong, raising $1.8 billion.

Now, the company is considering taking its bottled water unit, Evergrande Spring, public in Hong Kong, according to Bloomberg. But Shanghai Maoliang’s Shen says it is unclear how investors would react, especially when the parent company is mired in financial troubles of its own.

He points to the outcomes of HNA Group and chip giant Tsinghua Unigroup as examples of how Evergrande’s future may play out. The debt-laden firms are moving toward restructurings after bond defaults and past credit-fueled acquisitions failed to boost their businesses.

Electronics retailer Suning may also serve as a roadmap, says Lucror Analytics’s Zhou. Its former billionaire chairman Zhang Jindong stepped down after he lost control of the debt-strapped firm. Earlier this month, Suning secured a $1.36 billion bailout from a state-led group of investors who acquired a 16.96% stake. Zhang, a friend of Hui’s, once waived his right to a 20 billion yuan payment from Evergrande.

“Bringing in strategic investors is the best way for Evergrande,” she says. “But Hui may not want to give up control altogether. He may end up giving out stakes bit by bit.”