MCS | Evergrande Bankruptcy Imminent?

MCS | Evergrande Bankruptcy Imminent?

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The Hengda Group, the largest real estate builder in China, appears to be on the verge of bankruptcy. Hengda currently has about $300 billion in debt and $82.49 million in interest. Initially, this amount was supposed to be paid on the 6th of last month, but it was delayed for 30 days due to the inability to raise funds.

When the loan regulation policy targeting Chinese real estate companies was introduced in August of last year when the asset-liability ratio was at 70% or more, the net debt ratio was at least 100%, and the short-term borrowings ratio to cash was less than 1, the regulations to strengthen financial soundness to implement restructuring and supply reform was announced. As a result, up to 274 developers have gone bankrupt. In the aftermath of this, the Hengda Group went from bankruptcy to a de facto declaration of bankruptcy as it was tied to liquidity restrictions, which caused the government to intervene.

Although the Chinese government argues based on market crisis sentiment that this is an exceptional situation for some companies, it believes that a crisis will be inevitable for real estate developers who have purchased assets with low liquidity due to debt if creditors demand debt repayment.

Tether company "Does not hold Hengda Group papers"

Source: Flickr

Tether, a representative stablecoin USDT, said in an official clarification that it "Does not own Hengda Group commercial paper or securities."

But it may still be too early to be reassured.

Commercial papers are short-term bonds issued by companies to raise funds and tend to be linked together in the market. Therefore, the default of bills of a large corporation is likely to lead to the default of other corporations' accounts. Many experts predict that if Hengda Group, which owns about $300 billion in assets, goes to bankruptcy, it will take a massive blow to the market, so-called China's Lehman crisis. Considering that Tether's headquarters is located in Hong Kong, near China, it is difficult to say that commercial paper worth $30.8 billion in Tether deposits has nothing to do with the Chinese market.

For reference, according to Tether's deposit composition report on August 9, 2021, 49% can be seen as a safe asset without much disagreement. However, around 51% have the potential of a risky investment.

What is the future of Hengda Group? And how will it affect us?

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Thank you!

Sincerely,

MCS Team

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