Struggling Chinese property development giant China Evergrande is likely to default on its outstanding debts because the company has essentially lost its main business, according to a report by S&P Global Ratings.
In the report released Thursday, S&P Global Ratings analysts said that despite the company’s ability to sell assets and find ways to make payments in time, “Evergrande’s massive debt will catch up with it.”
“The firm has lost the capacity to sell new homes, which means its main business model is effectively defunct. This makes full repayment of its debts unlikely,” the report said.
“We still believe an Evergrande default is highly likely,” the analysts said.
While the developer has managed to stave off default with last-minute payments, the analysts said Evergrande’s bigger test will be when $3.5 billion comes due for U.S. dollar-denominated notes next March and April.
Evergrande earlier this month made interest payments on bonds that mature in 2022 and 2023, according to reports. It also reportedly made a payment on a third bond set to expire in 2024.
Even so, the company, which employs more than 200,000 people in 280 cities, has seen its shares drop by nearly 85% this year as it struggles under a debt load of $305 billion and teeters dangerously close to default.
While some investors expect the Chinese government to backstop the company in similar fashion to what the U.S. government did with some Wall Street banks in 2008, others suspect the government will avoid "moral hazard" and let Evergrande fail a la Lehman Brothers.
“We believe the government wants to unwind Evergrande in a controlled fashion, or let an orderly debt restructuring take place,” the S&P analysts said Thursday.
Evergrande's Hong Kong-listed shares fell more than 5% Thursday despite news it reached a deal to raise $273 million in an asset sale.