Evergrande Real Estate, the mainland’s most indebted developer, continued its buying streak this week by expanding its stake in Shengjing Bank to 27.24 percent, according to an announcement to the Hong Kong stock exchange.
The developer controlled by mainland billionaire Xu Jiayin paid RMB 10 billion ($1.54 billion) to buy just over 1 million shares in the Shandong-based lender, following up on a $500 million investment that it had made in the bank at the beginning of March. The transaction makes Evergrande the largest shareholder in the bank.
The Shengjing deal follows less than one week after Evergrande acquired Zhejiang-based developer Calxon for $554 million, and adds to the company’s already industry leading debt load, which it declared to be RMB 300 billion ($46.3 billion) at the end of last year.
Evergrande Eager for Consumer Finance Opportunity
Evergrande is buying its new stake in Shengjing, which is based in one of China’s most economically challenged areas, through five separate agreements with five different vendors. In explaining the rationale for this latest investment, Evergrande noted that Shengjing was recently granted approval to establish a consumer finance company, and is “one of the handful of banks holding a licence for consumer finance.
The developer said that it expects to generate a high return from its investment in the financial institution, although it did not specify targets for this return.
The more than $2 billion that Evergrande has now spent on Shengjing shares is actually the company’s second major foray into financial services, after it spent RMB 3.9 billion ($617 million) in November 2015 to acquire a 50 percent stake in Chongqing-based Great Eastern Life Assurance (China) Co.
The developer has since renamed that company as Evergrande Life Insurance and just last week injected another $1.4 billion in capital into the loss-making concern.
How Evergrande Spent $9.7 Bil in 10 Months
On Wednesday, one day before Evergrande announced this latest acquisition, credit agency Fitch Ratings downgraded the developer’s rating from BB- to B+ and gave it a negative outlook. The company’s bonds fared even worse with its senior unsecured and other outstanding notes getting downgraded from BB- to B- , according to a statement from Fitch.
The ratings agency attributed the downgrade to Evergrande’s ongoing high degree of leverage, which it said “leaves it with limited financial flexibility to face potential headwinds in the domestic property or credit markets.”
This level of indebtedness has only been exacerbated in recent months by an acquisition streak that analysts at JP Morgan characterised as displaying “immature capital management” in November – before the developer’s most recent $2.6 billion in investments.