The Evergrande Crisis Explained - Today's The Deadline, Why The World Is Worried

hey guys it's orchard you're watching the plane bagel i wanted to put out a bonus video this week to talk about the whole ever grand situation this is something that's been making a lot of headlines and it's gotten a lot of investors concerned about their portfolio because if if you're someone who invests chances are you noticed this week as you were minding your own business that the markets decided to sucker punch your returns and if you googled why your portfolio was down you would have come across a name that you probably haven't heard before which is evergrand a company that many are comparing to lehman brothers a very alarming comparison given that the collapse of lehman brothers was essentially what kicked off the 2008 financial crisis so i want to put up this video to hopefully communicate in a neutral manner the information that you should be aware of as an investor you know what's going on why it might impact your portfolio and all the pieces that are worth being aware of when it comes to your portfolio management and also covered the updates as of today because as you may know today was a very important key date for this company in terms of its debt so we'll touch on that as well but ultimately like everything else on the channel the intent is really just to inform you so that you're better prepared to navigate whatever tides lie ahead so let's start from the beginning what's never grand well while this company was a bit more obscure before this year they were actually one of the largest firms operating in china they have over 360 billion us dollars in total assets which represents two percent roughly of china's gdp and well they have investments and operations in areas like electric vehicles to even a theme park they are essentially a real estate developer they're actually china's number two real estate developer and as you probably gathered from the headlines this company is very close to going bankrupt over the years they've accumulated over 330 billion us dollars in liabilities now it's pretty common for developers to have a lot of debt because real estate gets very attractive interest rates as you may know as a home buyer mortgage interest rates are lower than most other interest rates given that you actually put your property up as collateral as security for that loan but with evergrand specifically they are actually the most indebted property developer in the world so it's a bit further than what you normally see in the industry and the thing is this isn't something that happened overnight evergren's been slowly accumulating the step pile to rapidly grow out its real estate portfolio for the longest time china's had a very rapidly growing real estate industry and they were borrowing very aggressively to buy more assets and to build more buildings and on top of that the company also financed some of its operations through pre-sales they would essentially get customers to put down down payments and in a way that was like getting a loan from your customers these people pay you money before you have to give them the goods and you would use that money to fund your operations but in august of 2020 the government decided to crack down on leverage in the real estate industry to help prevent a future financial crisis a bit ironically so they introduced what are called the three red lines which are essentially three metrics to measure a company's debt tolerance that if violated the company would face different restrictions in terms of its debt and evergrand right away violated all three and when you fail all three of these tests you are no longer allowed to grow your debt balance so all of a sudden evergreen was no longer able to borrow new money so all of a sudden you have this company that's been borrowing money rapidly to continue its growth in its operations having that lifeline cut off and facing all these liabilities they've accumulated both in terms of building actual buildings and paying off debts that they have already accumulated that they now can't seem to meet now under normal circumstances this company might actually look like it will meet its obligations because if you look at its balance sheet it actually reports a positive working capital balance it has current assets higher than its current liabilities but in reality their inventory includes property the vast majority of which is still under development clearly nowhere near being ready to go out the door not to mention that the balance sheet is recording these properties at face value when in truth their worth has deteriorated below this amount for the past year the company's been selling assets at pretty heavy discounts it's also tried to make its pre-sales more attractive to try and increase that avenue of getting financing for its operations but as customers saw that this company was increasingly discounting its prices some red flags started to show up and customers pulled back so the company's now been struggling to sell some of its assets including its real estate properties which brought us all to this week where markets dipped on the news that the company looked like it was going to miss a payment for one of its bonds this thursday while the markets were covered somewhat after the company dealt with its onshore debt obligations there's an 83.5 million us dollar bond payment of this thursday that seemed likely to miss to which you might say uh richard isn't today thursday uh yeah turns out today is not really the deadline that these headlines have been painted as because this coupon payment that's due actually has a 30-day grace period so while it's already past midnight in china and the company's not expected to make this payment they have bought some time to meet this obligation or at the very least negotiate terms around it but inclusive of these payments the company still owes 669 million dollars in coupon payments through the end of the year not to mention 7.4 billion dollars in maturing debt that they will have to pay back next year so clearly they are far from out of the woods but this brings us to the important question of why does this matter why do we care if ever grand as a company goes bankrupt bankruptcies happen all the time well at least for china this could be a massive economic disaster that'll impact a lot of stakeholders first of all there's the general population not only does the company currently have 1.5 million deposits for buildings it has yet to deliver but the company also operates a financial service firm that may not be able to pay people's deposits back given that the money deposited was being used for these developments the real estate market would also likely take a hit if this company is forced to fire sale it's its properties its assets which obviously would depress the prices of other real estate and given that real estate represents 29 of the country's gdp it would have a pretty wide impact on the economy the company is also a massive employer a big buyer from suppliers so if they default it will impact further up the supply chain and importantly just like 2008 this will likely impact the financial sector including investors like you and me if a company like evergrand were to default it means that everyone who's lent that money which would be banks and investors would be out that amount of money they would see a big hit to their personal financial situation their position and for investors this is really where the primary concern lies and that is contagion i know a poorly chosen term given uh the circumstances that we find ourselves in but it's it's a real financial phenomenon that could very well play out in this circumstance essentially as evergren misses its obligations the people that those obligations are to may have their own obligations that they need to meet so they'll sell their own assets to meet those obligations and that extra selling pressure can impact anything that those people essentially hold from stocks and common shares to cryptocurrency this can also lead to banks be more reluctant to lend out money to businesses who might need that extra debt to stay afloat and to some degree with emphasis on on the sum there this is similar to what happened to the 2008 financial crisis it wasn't just that the lehman brothers had gone bankrupt and that the us was experiencing a real estate crisis it was that the world economy was so intertwined that as people sold their assets it impacted all markets across the world and affected many stakeholders outside the country itself so that's essentially a summation of the investor fear around this situation it's not that investors have direct exposure to evergrand as a company you know they're not necessarily invested but it's that the people who are invested the people who have stake in the company both customers and companies as this company defaults those stakeholders might have their own obligations and it's kind of this you know spreading out tree if you will of obligations and relationships that could impact many different markets but that's the worst case scenario so what happens from here how do we know where this path will lead well there are still a few key players that have important decisions to make around this whole situation for one there's the chinese government obviously a very influential player in the country given that it's a communist party we've already seen some actions the central bank has already injected money into the system to help with liquidity problems and given that the government essentially controls the banking system they obviously have a lot of sway over how things play out but so far the government has signaled that they don't intend to bail out evergrand given that this would set a precedent for moral hazard if you will that companies would be able to do whatever they want and when their consequences catch up to them just rely on the government to bail them out but even if the government does intervene it's very likely that they'll prioritize domestic investors and domestic lenders over foreign ones so there's a chance that intervention doesn't calm all the nerves out there and that this could have a negative impact on investments in the whole region if these foreign investors are sort of tossed to the curb now the other key party are the creditors the people that this company owes money to and there is a chance that evergreen's able to negotiate a haircut where the company agrees to pay back a loan that's heavily discounted to essentially cut the amount that they agree to pay back so as you can see it's a big unknown as to what those two parties will do and adding to the anxiety of the markets if you will is obviously the bad timing obviously we're still dealing with a pandemic a lot of economies are still recovering and many governments and central banks are stretched pretty thin in terms of the stimulus that they've already enacted for the pandemic there's not a whole lot of firepower left to add further stimulus if there were to be some economic hit from this default when you add in the fact that stock valuations are already very high some investors are concerned that we're going to see a correction of some sort so take a deep breath that all sounds pretty bad but i will say that with all these headlines comparing this to lehman brothers it doesn't seem to be on the same scale as what we saw back in 2008 it's not to say that this isn't a serious situation it's not to say that you yourself might not see an impact from this company defaulting on its debt but the us was much more intertwined into the global economy compared to china which in many ways is still shut off to the world when it comes to certain industries and certain sectors especially when it comes to real estate compare that to the us which was a finance hub of the world we're just not simply set up the same way we were back with the lehman brothers bankruptcy now understand situations like these are scary you know these are people's financial situation we're talking about this is retirement plans this is savings accounts and i can't even imagine being in china as someone with a down payment on one of these buildings so i understand how it's easy to get caught up in the fear but i will say that the emotions of the market are really not a good indicator for your portfolio management and your investment strategy the markets are very fickle in their fixations just think earlier this year how important inflation was how it was making all the headlines and how much concern there was about inflation in the u.s it's not to say that it's still not a concern but it's obviously been put on the back burner and has been kind of put to the back of the mind of many investors and largely the markets which have vastly recovered since that point in time so clearly it doesn't make a whole lot of sense to base your portfolio management off of those sorts of emotions it's very difficult to predict what will happen and how it'll impact you as an investor and we toss in the fact that we have some key players who have yet to make their decisions about this company there's really just no way of knowing what will go down and how it will impact our portfolio so as always typically the best approach is just to focus again on the long term if you follow a well-balanced investment approach if you control your risks and you're aware of how much risk you can tolerate and further still if you truly appreciate the companies that you own and what their liabilities are and how they can withstand an impact like this you kind of rest easy when you have that sort of knowledge so hopefully that brings you up to speed as to the situation we currently face and why investors and markets are concerned about everything going on i hope you enjoyed the video and found value in it if you did please do comment like subscribe all that good stuff and i'd be interested to hear your thoughts about the ever grand situation are you banking on this company going under as some people are forecasting or do you think that we're going to see some key player come through and possibly save this business which some have deemed too big to fail i'd love to hear your thoughts in the comments down below as always thanks for joining me and yeah be safe out there

Channel: The Plain Bagel

Views: 112,481

Rating: 4.9647164 out of 5

Keywords: Evergrande

Id: 6VDPmDPombs

Length: 12min 23sec (743 seconds)

Published: Thu Sep 23 2021