Analysis Of The Week: Not Such Grand Designs​

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By Alison Catchpole​


The Story

It has been dubbed a “Lehman scale crisis” (Law.com). Evergrande, part of the Global 500 – one of the world’s biggest businesses by revenue – is “teetering on the brink of default, with more than $300bn of total liabilities...which could spark China’s biggest debt restructuring” (Financial Times).

Owning more than 1300 projects across almost 300 Chinese cities, the real estate arm of Evergrande has been growing and diversifying. However, aggressive borrowing, to the tune of $300 billion, led the company to become China’s most heavily indebted developer (CNN). The bond will technically go into default thirty days after the missed payment.
The Hong Kong-listed company's shares tumbled around 90% between July and late September (CNBC). In early August, S&P Global downgraded Evergrande’s rating by two notches to 'CCC' (Reuters). The missed payment in late September sparked a sell-off in Asian high-yield bond markets where Evergrande has borrowed heavily.

The Background

Headquartered in the southern Chinese city of Shenzhen, Evergrande was founded by businessman Xu Jiayin in 1996. He became, for a time, Asia’s richest man - with a personal fortune of $10 billion (£7.3 billion) (BBC). Evergrande builds around 600,000 homes a year, with many bought off-plan by Chinese purchasers, who currently do not know if they will get their money back.
Evergrande is also involved in a diverse portfolio of investments, including electric vehicles, theme parks, and even one of the country’s biggest football teams, Guangzhou FC.

29% of China’s gross domestic product (GDP) “is made up of real estate activities (construction and related services)” (Financial Times), and 18.34% of the world’s GDP comes from China (statista.com). In 2020, the Chinese government put forward three ‘red lines’ to rein in debt levels amongst property companies. This was assessed on the basis of three metrics, including the ratio of liabilities to assets, net debt to equity, and cash to short-term borrowings. This heavily impacted smaller developers, but at the other end of the scale, Evergrande was also unable to continue raising cash in the same way.

Evergrande reportedly owes money to around 171 domestic banks and 121 other companies (BBC). Allegedly, they previously offered discounted properties and put pressure on staff members to lend the company money, marketed as high-interest investment schemes (The Guardian). Recently, they have pursued asset sales to raise cash (Financial Times).

What It Means For Businesses And Law Firms

By August 2021, Evergrande had been hit by 427 legal cases, compared with 436 in the whole of 2020 (Financial Times). With a long and complex supply chain, there are a range of cases that include contractor disputes, architectural and advertising bills, and more.

In late September, S&P Global issued a report stating “We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy.” It remains to be seen whether the Chinese government can escape this risk.

Law Firms Involved:

US global investor rights law firm Rosen Law Firm, which specialises in class actions, has announced that it is investigating potential securities claims on behalf of Evergrande shareholders. These result from allegations that Evergrande may have issued materially misleading business information to the investing public (BusinessWire).

According to Bloomberg, King & Wood Mallesons has been appointed by the Chinese government to investigate the financial indebtedness of the company. Kirkland & Ellis has been engaged to represent a group of bondholders to advise on the potential restructuring of Evergrande (Law.com).