Earlier in the year, I wrote an article on Evergrande and some of the underlying issues affecting the company. As of this writing, Fitch Ratings had placed Evergrande into its “restricted default” category.
This means that even though, from the outside there are no clear signs of the Evergrande defaulting. Based on metrics gathered from the company, it’s clear that the company is going to default. The company could easily file for bankruptcy anytime soon.
To show how really bad things are, one of the main reasons why Fitch Ratings came to this conclusion is because they firmly believed that they missed their $82 million bond payment on Monday. This is then prompted them to issue out this bold announcement about Evergrande.
Will the Chinese government allow it?
It’s hard to tell what China will do, but as an outsider for a company that has over $300 billion in debt. It would be catastrophic not just for China but for global markets around the world as many foreign creditors and investors are attached to this ticking bomb.
A default may be inevitable but it is not probable. A major strategy that is being touted around by nervous investors is restructuring. A restructuring could happen which might be a painful process but might be the best solution to get out of this perceived labyrinth.
On Thursday, China’s central bank governor gave an interesting insight on what might be the future of Evergrande.
“The risk of Evergrande is a market incident which will be properly handled in accordance with the principles of marketization and rule of law, and the rights and interests of creditors and investors will be protected in accordance with the law,” he said.
Restructuring Woes
If restructuring comes to the forefront, it will be a complex task due to how far the Evergrande beast has grown. Questions remain about how this will even be possible if they undergo such a task.
It would span across many jurisdictions with different rules and business ethics. Skeptics don’t see this happening anytime soon. It would be akin to cutting a cardboard with a butter knife trying to get smooth edges.
Many investors were looking for Evergrande to be bailed out by the Chinese Government. If that’s the case it’s not going to be easy. Recently China’s authorities have been working to reduce its debt problem.
This includes allowing businesses that have an unsustainable debt to feel the heat. Evergrande might be one of those businesses that might have to get its head on the chopping board.
For now, the Evergrande debacle might be the one to serve as a lesson for Chinese businesses who are willing to take on large amounts of debt to keep their companies afloat. Fearlessly expanding without knowing how it is going to be paid off when the unexpected happens.
