Brewing crisis with huge Chinese property developer Evergrande casts cloud over real-estate giants, including Greenland, parent of Atlantic Yards/Pacific Park master developer

Update: a statement from the developer saying it's "fully committed and resourced to complete Pacific Park Brooklyn" and it's "unaffected by unrelated corporations around the world," plus some comments in response.

A brewing crisis with China's once-busiest property developer --with more than $300 billion in debt--could have significant ripple effects in the Chinese and world economies, and especially with other developers. 

That suggests a cloud over Greenland USA, the U.S. arm of Greenland Holding Group, the Atlantic Yards/Pacific Park master developer (owning nearly all of Greenland Forest City Partners), making it harder to access the capital to move forward with the project, notably an expensive platform, in two phases, for six towers over the Vanderbilt Yard.

But it's a fluid situation.

The "three red lines"

Let's recap. Investors Have a New Default Worry in China’s Debt Market, Bloomberg News reported 1/11/21, noting that mid-sized developer China Fortune Land Development Co. Ltd. was seeing its bond prices plunge, even as the national government was pursuing guardrails to lower real estate risk.

China Fortune's stock price has continued to plunge.

From the article:

Rising fears over China Fortune Land’s financial health are weighing on other Chinese property firms’ dollar bonds too. Greenland Holding Group Co.’s dollar bond due 2024 fell 4.8 cents on the dollar to 88.7 cents, the most since March...

China’s debt-laden real estate firms are once again under scrutiny after China Evergrande Group, the world’s most indebted developer, caused brief turmoil in the country’s financial markets due to fears of a cash crunch in late September. Beijing is now planning to expand a trial program aimed at curbing financial risk in the property sector by adding more firms to a watchlist of 12 developers that need to meet debt metrics known as the “three red lines” if they want to borrow more. Last month, regulators also took an unprecedented decision to impose caps on banks’ lending to developers.

China Evergrande bond investors still wary as near-term risks ease, Reuters reported 6/29/21:

China Evergrande Group (3333.HK) may have cleared a near-term debt hurdle with arrangements for bond payments through next March, but investors are still giving the developer a wide berth as it struggles to downsize and reduce debt.

...Those concerns have soared since a leaked document in September showed Evergrande sought government help to avert a cash crunch, as it works to meet Beijing's debt-ratio caps for developers dubbed the "three red lines".

... [Evergrande] has said that it aims to achieve all three "red line" targets by the end of 2022.

And now

First, a video explainer from The Real Deal:

Evergrande Crisis Shows Cracks in China’s Property Market, the New York Times reported 9/21/21, citingL

Angry home buyers are waiting on as many as 1.6 million apartments to be completed. Suppliers of cement, paint and rebar are owed more than $100 billion in payments. Workers are panicking that loans they made to their employer cannot be repaid.

The result: "a global chain reaction on Monday, pushing stock markets down as shares of Chinese home builders and large multinational companies tumbled." Then, warnings from analysts:

While market observers once took as a given that Beijing would step in at the first sign of distress, rating agencies, banks and investors have all factored in a possible Evergrande default. Many now predict Beijing will not intervene until other property developers begin to fail and pose a collective risk to the broader financial system.

The Times suggests the government has "two bad options": forcing banks to lend to Evergrande--which could lead to other developers demanding the same--or to let Evergrande fail, with painful and unpredictable effects.

What about Greenland?

Chinese developers in US struggle as Evergrande mess threatens business back home, the Real Deal reported 9/20/21, noting that three companies active in the U.S., including Greenland, "have each crossed at least one of the 'three red lines' set by Chinese regulators. Failure to comply with the limits places restrictions on new borrowing.

Indeed, as I wrote last August, rating agency S&P estimated at the end of 2020 that only 6.3% of rated Chinese developers could comply with the "three red lines" measuring an issuer's fitness to borrow, constraining debt growth. Those metrics are: net debt to equity; liabilities to assets; and unrestricted cash to short-term debt. 

S&P said Greenland had breached all three red lines as of end-2020, but the company announced it has complied with one of the red lines since February. That, according to the Real Deal, is the net debt to equity ratio.

But that still doesn't mean Greenland will have access to new capital soon.

The bigger picture

Beyond Evergrande’s Troubles, a Slowing Chinese Economy, the Times reported yesterday:

China Evergrande Group, the developer, said on Wednesday that it had reached a deal that might give it some breathing room in the face of a bond payment due the next day. But that murky arrangement doesn’t address the broader threat for Beijing’s top leaders and the global economic outlook: China’s growth is slowing, and the government may have to work harder to rekindle it.

The gist: even if fears of a major collapse are overblown, China's real estate market is still weak, as is the overall economy.

And today

This morning, a cascade of headlines from Reuters.

Evergrande domestic debt deal calms immediate contagion concern:

SINGAPORE/SHANGHAI, Sept 22 (Reuters) - China Evergrande agreed to settle interest payments on a domestic bond on Wednesday, while the Chinese central bank injected cash into the banking system, temporarily soothing fears of imminent contagion from the debt-laden property developer.

China tells Evergrande to avoid dollar bond defaults, Bloomberg reports

In a recent meeting with Evergrande (3333.HK) executives, regulators said the company should communicate proactively with bondholders to avoid a default but didn't give more specific guidance, it reported, citing a person familiar with the matter.

China preparing for Evergrande's downfall - WSJ

Chinese authorities are asking local governments to prepare for the potential downfall of debt-ridden China Evergrande Group (3333.HK), the Wall Street Journal reported on Thursday, citing officials familiar with the discussions.
...Local governments have been tasked with preventing unrest and mitigating the ripple effect on home buyers and the broader economy, the officials said, according to the report.

Evergrande debt crisis ensnares mom-and-pop investors, builders and homebuyers

Property accounts for 40% of assets owned by Chinese households, according to Macquarie, which means contagion from a potentially messy Evergrande collapse could reverberate beyond households and investors to suppliers and construction workers.

The bottom line: stay tuned. Indeed, the New York Times offered Uncertainty swirls around China Evergrande as a payment deadline passes., noting that, even with such uncertainty, "the market rallied," apparently because investors think China will protect Evergrande.