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Heavily indebted Chinese developer Evergrande warns of default risk

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Evergrande Real Estate Group Ltd updates

Evergrande has warned it risks defaulting on its debt if it fails to raise cash, as China’s most heavily indebted property developer battles to stave off an unfolding liquidity crisis.

The unusually stark wording from the company came in an interim earnings statement on Tuesday that confirmed a profit warning issued last week and outlined a series of measures to shore up its finances that include selling properties.

“The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business,” Evergrande said, adding that it would pursue further asset sales, control costs and seek to attract new investors.

The warning comes as Evergrande experiences the worst upheaval in its history, with a stream of recent problems raising questions over its access to financing, forcing it to sell assets and earning it an unusual public rebuke from the government over its debt risks.

Evergrande said “negative reports” about its business had had “adverse effects” on its liquidity, leading to delays in construction fees and supplier payments which, in turn, resulted in work on certain projects being suspended. It said it was co-ordinating with the government on the matter.

“If the relevant projects do not resume work, there may be risks of impairment on the projects and impact on the group’s liquidity,” the company said in its earnings report, which showed that net profits fell 29 per cent year on year to Rmb10.5bn ($1.6bn). It has 778 projects across 223 cities in China.

Evergrande, which has for decades expanded on the back of China’s sweeping urbanisation and whose chair Hui Ka Yan was the country’s richest man, is now racing to cut its debts. It said its total borrowings were Rmb572bn as of the end of June, down from Rmb717bn at the end of 2020.

Its woes have helped push borrowing costs across China’s riskiest offshore borrowers higher in recent months.

China’s biggest property developers have all come under pressure from Beijing’s deleveraging policies launched last year, but Evergrande has endured a particularly chaotic 12 months after plans to list its mainland subsidiary in Shenzhen fell through, sparking fears of a potential cash crunch.

Market challenges were exacerbated by a number of more recent issues, including a court order freezing one of its bank deposits, and the halting of projects by local authorities. Evergrande, which relies heavily on prepayments from customers and the issuance of commercial bills to contractors, is on course to face record numbers of legal cases in Chinese courts this year.

As part of its efforts to raise cash, Evergrande is seeking to offload a stake in its electric vehicle business, which has yet to sell a car and whose shares have collapsed 80 per cent this year, as well as its property services group. Evergrande’s own shares are down roughly 70 per cent in the year to date.

Nigel Stevenson, an analyst for GMT Research in Hong Kong, said Evergrande’s “options have narrowed” and that there were “huge amounts of assets on the balance sheet that are of uncertain value”.

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