Analysis | How China Evergrande’s borrowing time (and time again)

It’s becoming a tradition. China Evergrande Group has started the year three times since 2014 by asking bondholders to loosen restrictions on raising more debt and spending on acquisitions. It then goes on a borrowing and buying spree. The result has been a series of credit downgrades that has China’s most indebted developer on the verge of the C category, associated with imminent default.

The Guangzhou-based company is offering notes payable in 2020 and 2022, Bloomberg News reported on Friday, citing people familiar with the matter. The move comes only three days after Evergrande got holders of its outstanding offshore bonds to relax constraints on how much debt the company can assume.

Among other things, Evergrande was allowed to increase the amount of permitted investments to 25 percent of assets from 20 percent. Other rules were eased that freed some subsidiaries to take on more debt individually. Evergrande had 999.9 billion yuan (USD144.9 billion) of assets as of June 30, so the company in effect just obtained a blank check to increase its permitted investments by $7.2 billion.

When the Hong Kong-
listed developer asked bondholders to agree to the changes, it justified them by saying it was trying to do a share offering in China that would increase equity, which should be a welcome prospect for creditors.

The company made similar requests at the beginning of both 2014 and 2016. Subsequently, Evergrande went on to increase its leverage to astronomical levels. Its total debt to common equity ratio went from 224 percent at the end of 2013 before the first “consent solicitation,” as such requests are known, to 809 percent at the end of June.

Even that measure doesn’t fully reflect Evergrande’s leverage, as I have noted before. The company has issued preferred shares and perpetuals, which are treated as equity but have more debt-like characteristics. If those are factored in, the developer owes $91 for every $9 of stock on the balance sheet – a leverage ratio of more than 10 times.

As Evergrande’s leverage has climbed, S&P Global Ratings has moved the company from a BB score to B- with a negative outlook. Given the increase in debt ratios, the likelihood of a downgrade to the C category now looks high. Christopher Langner, Bloomberg