Evergrande Risks Default After Failing to Sell Services Unit

Ibeth Rivero

Chinese real estate company Evergrande failed to reach an agreement to sell a part of its services unit to the company Hopson Development Holdings.

Evergrande had been trying to sell 50.1% of its property services to its competitor, though the talks ended up falling through. This implies that Evergrande will probably be unable to cover about $83 million in interest payments by Saturday, increasing the risk of default.

The company claimed that the accord fell through since it had reasons to believe that the purchaser had not met the requirement to make a general offer for shares.

"The Company had reason to believe (based on information from various sources (other than the Securities and Futures Commission)) that the purchaser had not met the prerequisite to make a general offer for shares in Evergrande Property Services," announced Evergrande in a statement.

Hopson claimed that it had been prepared all this time to complete the sale of the shares, adding that other parties wanted to change the terms of the agreement, a move that they found unacceptable.

Evergrande is about $300 billion in debt, and it is believed that it won't be able to comply with all its financial obligations. This puts at risk the Chinese real estate market, which accounts for about 15% of the country’s GDP.

For now, the company is looking to secure an extension for its debts, as well as other alternative arrangements. Most recently, the company secured a three-month extension on a defaulted bond. The company is also looking to sell its assets, though it recently announced that there had not been material progress in this regard.

It is not clear how the Chinese government is going to deal with this situation. The People's Bank of China has announced that Evergrande’s case is controllable, and most recently the bank's governor commented that the first measure of response is preventing risks from spreading to other companies in the sector.

Evergrande's shares have plunged since the beginning of today's session, when the company's stock dropped by 12.54%, closing at the 2.58 level. In weekly terms, it has dropped by 12.20%, after gaining 25% in the previous week. In contrast, Hopson Development Holdings stock prices gained 13.24%, closing the session at the 28.00 level and recovering from yesterday's 7.59% drop.

Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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