Chinese banks limiting funding to Evergrande on debt risk

SHANGHAI • Several large Chinese banks are restricting credit to China Evergrande Group amid growing concerns about the developer's financial health, according to sources.

Three banks with a combined 46 billion yuan (S$9.6 billion) of credit exposure to Evergrande as at June last year have decided not to renew loans to the company when they mature this year, the sources said, asking not to be identified discussing private information.

The decisions were made before Evergrande's bonds began tumbling at the end of last month and resulted from banks' internal risk assessments, the sources said.

Three other banks are allowing Evergrande to roll over portions of credit lines it has already tapped but are limiting the company's access to any untapped credit from those lines, the sources said.

These banks decided against a more restrictive stance partly owing to concern that a large reduction in lending to the world's most indebted developer could destabilise China's financial system before the politically sensitive 100th anniversary of the Communist Party on July 1, the sources said.

Some Chinese trust firms - the second-biggest lenders to Evergrande after banks - have also been reassessing their exposure to the company, sources said.

One firm no longer considers guarantees from the group as sufficient for lending to its subsidiaries, focusing instead on the quality of collateral backing the loans. Another is reviewing whether to issue new products tied to Evergrande.

While the moves do not by themselves suggest Evergrande is at risk of an imminent liquidity crisis, they do show it faces dwindling options as it looks for ways to repay debt.

Evergrande remains heavily reliant on bank funding even after some lenders took preliminary steps to reduce their exposure in the second half of last year.

Bank loans and other borrowings from firms accounted for about 81 per cent of the developer's 335.5 billion yuan of interest-bearing debt due this year, according to its latest annual report.

In a response to questions from Bloomberg on Monday, Evergrande denied that banks were curbing its access to funding and said its business relationships with all banks and financial institutions were normal, without elaborating.

Major Evergrande creditors including Industrial and Commercial Bank of China and Bank of China did not immediately respond to requests for comment.

Evergrande, controlled by billionaire Hui Ka Yan, unveiled plans in March to roughly halve its debt over the next two years, and has also pledged to meet at least one of China's regulatory borrowing limits for developers, known as the "three red lines," by the end of this month.

The company has been ramping up home sales - sometimes at significant discounts - and offloading other assets to free up cash.

On Monday, Evergrande said it would sell shares in a Hangzhou unit to a company controlled by Mr Wang Zhongming, a repeated investor in Mr Hui's operations.

It is the billionaire's latest move to tap financial support from deep-pocketed friends.

Evergrande's stock jumped 9 per cent on the news, rebounding from a four-year low and delivering a hit to short sellers who had piled into bearish bets in recent weeks.

The company's shares and bonds had tumbled since the end of last month after missed payments at Evergrande affiliates and a report that regulators are probing the developer's ties to Shengjing Bank, a lender in which it owns a stake.

Evergrande has said it will arrange payment for overdue commercial paper at its affiliates and that its dealings with the bank are compliant with Chinese law.

Junk-rated bonds issued by Evergrande that mature in June 2025 fell 0.5 cent on the dollar to about 73 US cents yesterday, data compiled by Bloomberg shows.

By declining to roll over loans to Evergrande, some banks are taking an even more cautious approach than required under the "three red lines" framework.

While Evergrande is prohibited from taking on additional debt after becoming one of just four major real estate companies to breach all three red lines at the end of last year, the developer can roll over existing loans if banks agree to do so.

Trust firms have already significantly reduced their exposure to Evergrande, according to data compiled by Use Trust. The developer has raised just 9.3 billion yuan from trust issuance so far this year, down 85 per cent from the first six months of last year. Such financing accounted for 41 per cent of its total borrowing at the end of 2019.

Evergrande has long been a source of angst for Chinese regulators and creditors.

In 2018, the central bank singled out the developer as a business that might pose systemic risks to the nation's financial system.

Chinese regulators recently instructed major creditors of Evergrande to conduct a fresh round of stress tests on their exposure to the company, sources said earlier this month.

Evergrande's complex web of liabilities - including bank loans, bonds and down payments from home buyers - swelled to 1.95 trillion yuan at the end of last year, about 77 per cent of which was due within 12 months, according to its annual report.

With more than US$20 billion (S$26.9 billion) of offshore bonds, Evergrande is one of the most prolific Chinese issuers of dollar debt.

It is considered a litmus test of the government's willingness to support embattled borrowers as policymakers try to balance maintaining financial stability and reducing moral hazard.

BLOOMBERG