China's realty giant warns of defaulting on $305-billion debt

The government is assembling accounting and legal experts to assess the finances of Evergrande, a potential precursor to a restructuring of the world's most indebted developer

China Evergrande is teetering between a messy meltdown with far-reaching impacts, a managed collapse or the less likely prospect of a bailout by Beijing for what was once the country's top-selling property developer.

Founded in Guangzhou in 1996, Evergrande has epitomised China’s freewheeling era of borrowing and building, but with liabilities of nearly two trillion yuan ($305 billion) its possible collapse looms as one of China's largest for years.

Debt and land-buying curbs and hundreds of new rules have been imposed on Chinese developers over recent years as part of a push to cut financial risks and promote affordable housing.

Evergrande, which accelerated efforts to cut its debts in 2020 after regulators introduced caps, does not have any major offshore bond maturities until early next year but tardy payment of suppliers and interest on loans have brought to a head concerns that have long nagged at investors.

Now, without access to fresh funding, Evergrande cannot pay suppliers, finish projects or raise income, prompting it to hire advisors and warn of default risk. This, along with a buyout, break-up or bailout are the scenarios now being evaluated.

And while analysts have played down comparisons to the 2008 collapse of US investment bank Lehman Brothers, which caused crises at counterparties and ultimately seized up global markets, some investors have similar contagion concerns.

“If as expected Evergrande is defaulting on its debt and goes through a restructuring, I don't see why it would be contained,” Michel Lowy of banking and asset management firm SC Lowy, which focuses on distressed and high-yield debt, said.