Hong Kong property giant would be in financial trouble without Central Bank’s help

Hong Kong’s second largest property developer can’t pay interest payments on $13 billion of loans, and is headed for serious difficulties, according to media reports in mainland China.

Investors are calling on the state-owned company to seek a loan from the Chinese central bank to shore up its accounts. They also speculate that the company might be locked in a takeover tussle with other Chinese companies.

If there’s no new loan from the People’s Bank of China, then Evergrande’s cash flow will be squeezed. At the end of the first quarter, the property developer had 9.3 billion yuan ($1.6 billion) in cash, though that’s after its gearing ratio — a measure of the amount of debt on its balance sheet to its cash — was 1.9:1. If Evergrande is struggling to make interest payments, then it will have difficulty paying for new developments, which the company pledged as collateral.

This could lead to Evergrande’s biggest shareholder, property conglomerate Sunac China Holdings Ltd., putting pressure on the company to accept a loan from the central bank. The central bank has over 600 billion yuan ($91 billion) available for loan support, according to AFP. If Evergrande does not pay the loans, all of Sunac’s investment in the company will be thrown out of balance.

However, the company could still survive without new loans. It can make funds available, and new buyers will always make deals to purchase their properties. They are best-positioned to absorb any unpleasant surprises.

The company can use a portion of the proceeds from its $5.6 billion initial public offering of common stock, which took place in Hong Kong two years ago. It can also rely on recent pledges by five senior executives to relinquish more than half of their shareholdings.

In the meantime, the southern Chinese city of Guangzhou will step in and help the company pay for new projects. The city’s third largest banks have agreed to hold 60 percent of a project the company had planned to build for 30 days.

Editor’s note: This post has been updated with additional context and clarification.

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