What happened
Shares of China's troubled property company Evergrande Group (OTC: EGRN.F) were suspended from trading on Monday due to the announcement of an order to demolish 39 buildings under construction in China. According to local reports, the building permits were illegally obtained, and authorities had consequently ordered their destruction.
Image source: Getty Images.
So what
It's the last thing equity investors, bondholders, and Evergrande property investors wanted to hear. The company is engaged in an ongoing struggle for survival that involves selling assets and shares to pay suppliers and meet bond coupon payments. The news that it will have to destroy buildings under construction will not be well received.
Both Evergrande and another large China property group, Kaisa, have missed bond payments, and rating agency Fitch has already cut their debt ratings to restricted default. Moreover, Fitch's analysis assumes both companies will be liquidated in bankruptcy. For a flavor of how bad things are in the sector, consider that Fitch estimates the value of Kaisa's investment properties is just 17% of the book value given by the company at the end of the first half of 2021.
Now what
It's no secret that Evergrande and Kaisa are in liquidity trouble, but the critical question is whether there will be contagion in China's credit markets. The answer to that probably comes from potential government action to limit the fallout in the sector by helping Evergrande with a restructuring plan. Until that happens, investors have cause to be very cautious about the sector in general.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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