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(Bloomberg) -- On the face of it, China Evergrande Group made progress cutting its debt load in the first half of the year. On closer examination, paying its dues got even harder.
The developer’s borrowings, or interest-bearing debt, fell to a five-year low as of June 30, results showed late Tuesday. But its overall liabilities rose to a near-record 1.97 trillion yuan ($305 billion), thanks mainly to swelling bills to suppliers. Cash and cash equivalents plunged to a six-year low.
The upshot: Evergrande will need to accelerate asset sales and continue to aggressively discount apartment prices to generate enough cash to meet its obligations. Bonds tumbled after the world’s most indebted developer said it risks defaulting on borrowings if its all-out effort falls short.
“Now it’s at a critical point,” said Chuanyi Zhou, a credit analyst at Lucror Analytics. “If asset sales and introduction of new investors don’t progress well and meet the government’s expectation, a default is likely to happen, possibly followed by an out-of-court arrangement with creditors.”
Evergrande said it’s exploring the sale of interests in its listed electric vehicle and property services units, as well as other assets, and seeking to bring in new investors and renew borrowings. Sharp discounts to swiftly offload apartments cut into margins in the first half, helping push net income down 29% to 10.5 billion yuan, in line with an earlier profit warning.
“The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business,” the Shenzhen-based company said in the statement. “Shareholders and potential investors are advised to exercise caution when dealing in the securities of the group.”
Evergrande’s 8.25% dollar bond due in March fell 7.2 cents on the dollar to 37.6 cents on Wednesday, according to Bloomberg-compiled data, on pace for a fresh record low. Its 8.75% note due 2025 -- once one of the most widely traded Chinese dollar notes -- slid 4.8 cents to 29.8 cents. The company’s shares dropped 3% in Hong Kong, taking this year’s decline to 72%.
“A fire sale of more assets could be needed to ease Evergrande’s liquidity woes, yet this would worsen its earnings and margin outlook, already the most dour among peers,” said Bloomberg Intelligence analysts Patrick Wong and Lisa Zhou.
With banks, suppliers and homebuyers exposed to the real estate giant, any collapse could roil China’s economy, raising questions over whether it might receive state support. Regulators urged Evergrande to resolve its debt woes in a rare public rebuke earlier this month.
Among Evergrande’s top lenders are China Minsheng Banking Corp., Agricultural Bank of China Ltd. and Industrial & Commercial Bank of China Ltd.
Still, some see little risk that the problems at Evergrande will spread to hurt the bonds of other Chinese developers.
“Unfortunately it looks like it’s going to be a train wreck” for Evergrande, Teresa Kong, a portfolio manager at Matthews International Capital Management LLC in San Francisco, said on Bloomberg Television. “This is very much due to idiosyncratic risk as opposed to systematic risk that might be contagious.”
Evergrande said some property development payables were overdue, leading to the suspension of work on some projects. The company is negotiating with suppliers and construction contractors to resume the work, it added.
“The group will do its utmost to continue its operations and endeavor to deliver properties to customers as scheduled,” it said.
Evergrande’s debt shrank to 572 billion yuan, according to Bloomberg calculations based on the results. That’s down 20% from 717 billion yuan at the end of last year and 15% from 674 billion yuan in March. Still, trade and other payables climbed 15% from six months earlier to a record 951.1 billion yuan.
The company still falls short on two of China’s so-called three red lines -- metrics imposed on developers as part of a crackdown on leverage in the industry. It has pledged to meet all three by December 2022.
One measure -- the ratio of cash to short-term borrowings, a gauge of liquidity -- worsened in the period to 36% from 47% at the end of last year, as its cash and equivalents plunged to the lowest in six years, Bloomberg calculations based on the results show.
(Updates bonds in the seventh paragraph)
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