China real estate developer Guangzhou Evergrande was singled out by credit agency Fitch Ratings this month for its high levels of leverage and aggressive sales forecast, as lenders begin to look more closely at the risks facing Chinese property companies.
The diagnosis from the US-based ratings service came soon after Evergrande scored a public relations bonanza last month by announcing non-binding credit agreements with several lenders last month which led many observers to believe that the company had secured funding that was not yet in hand.
The developer run by flamboyant billionaire Xu Jiayin (also known by his Cantonese name Hui Ka Yan) has been criticised by a number of analysts for its wanton expansion into unrelated business lines and use of financial devices such as perpetual bonds, which can conceal true levels of debt from the company’s balance sheet.
Uncertain Financial Discipline
Fitch, which is one of three ratings agencies recognised by the US’ SEC said in a statement that, “Evergrande’s net debt/adjusted leverage remained high at 53% at end-2014 (end-June 2014: 57%), and above levels at its peers.”
The US financial services firm also indicated that Evergrande was in danger of having its credit further downgraded from its current BB- rating and reconfirmed its negative outlook on the developer’s potential to default.
As an international bond issuer, Fitch expressed skepticism about Evergrande, citing “the very narrow gap between its credit metrics and the levels that may trigger negative rating action and the uncertainties with Evergrande’s financial discipline.”
Cash on Hand Insufficient to Cover Obligations
Having reviewed Evergrande’s 2014 financial, the company appears to be under pressure to meet its financial obligations in 2015.
As of the end of 2014, Evergrande’s cash balance of RMB 59.5 billion is not adequate to resolve its RMB 79.7 in short term debt and unpaid land purchase premiums due to local governments of RMB 24.5 billion.
These looming liabilities make it important for Evergrande to hit its targets in 2015, and these goals may prove lofty.
Fitch points out that Evergrande is aiming for RMB 150 billion in contracted sales in 2015, growth of 15 percent over its 2014 number for a company which already ranks among China’s top five developers in terms of the scale of its sales. In general, China’s real estate industry has been slowing over the last year with sales dropping off 16.3 percent in the first two months of 2015 compared to the same period last year.
Company Diversified Rapidly in Past Two Years
Evergrande may also find it challenging to support multiple new ventures the company has taken on during the last two years in a number of new business areas.
Late last month the real estate developer announced that it was cancelling a $15 billion venture into solar power that it had launched to great fanfare last year. While it has followed many other Chinese developers overseas, Evergrande has also wandered into ventures in areas as diverse as magazine publishing, cooking oil, drinking water and private hospital development.