It’s only 50% higher than thought when off-balance sheet liabilities are included so no worries. Goldman:
Market concerns center on potential spillover from Evergrande concerns. Whilst prices on Evergrande bonds have ranged between mid to high 20s over the past two weeks, the rest of the China property HY space has been under pressure, with noticeable price declines across both BB and B rated credits. To us, the price action suggests that investors have become less concerned about issues specific to Evergrande, but more concerned about the potential spillover impact on the broader China property market. Our view has been that if Evergrande’s onshore operations can be maintained as a going concern, then there could be less scope for contagion impact. But a recent report from Bloomberg that the company has missed payments on its wealth management products raises concerns regarding potential off-balance sheet liabilities, and in this note, we assess their potential impact.
Potential off-balance sheet debt and contingent liabilities a focus. We look at five different areas to assess off-balance sheet liabilities, namely debt and mortgage guarantees, wealth management plans, equity put back options and outstanding commitments, based on which we estimate Evergrande has potentially RMB 1tn(USD 156bn) in off-balance sheet debt and contingent liabilities. Although the amount is large, our analysis indicates that around 90% consists of contingent liabilities in the form of mortgage guarantees and commitments. This highlights the importance of maintaining the onshore property development business as a going concern, and preventing such contingent liabilities from materializing.
