crane on top of building

Evergrande Crisis in China

INVESTOR ALERT: China’s Evergrande Group Continues to Threaten Worldwide Markets

The world is watching China’s Evergrande Group as investors worry that there is an imminent collapse of a so-called “too big to fail” company.

What is Evergrande?

The Evergrande Group is one of China’s largest real estate development companies. The company has its hands in more than 1,300 projects throughout China, accounting for hundreds of billions of dollars. Reports indicate that Evergrande has told investors that the company may default on its loan obligations, which could have catastrophic effects on worldwide markets.

Part of Evergrande’s business model involves accepting cash deposits from individuals who want apartments for personal or investment purposes. In turn, Evergrande takes that money and builds the apartments. This is quite different from traditional real estate development, where most companies obtain traditional bank loans for construction projects.

This approach has apparently worked well for Evergrande until the past several years as debt obligations have loomed. Major interest payments are due this week and could cause further problems for Evergrande and worldwide markets.

Evergrande reportedly owes more than 1.5 million apartment units to investors who placed cash deposits for the company to build them. Thus, Evergrande may not be able to deliver on its promises to build the units.

There are several other factors in place here that contributed to Evergrande’s problems that are flooding the news cycle. However, this article will focus on the numbers and determine whether investors may have claims against Evergrande.

Moody’s Ratings

Credit ratings are normally reliable indicators of success and failure for companies. Nearly every major company that is publicly-traded is monitored closely and consistently for credit changes and risk analyses. Moody’s is one of the three major credit rating companies that Wall Street depends on for such research.

Before this week’s news became widespread throughout the world, Moody’s issued a statement in early September on its downgrade of Evergrande Group. Moody’s uses a corporate family rating (CFR) for its research, which is essentially a long-term outlook on a given company’s likelihood of default on debt and the effects of such default.

Substantial Credit Risk

Moody’s downgraded Evergrande Group’s CFR from “Caa1” to “Ca.” If you are new to corporate credit rating systems, the scale ranges from A to D, with A being the best and D being the worst. There are also subsets of grades within each letter grade that provide more intricate analyses on the company (i.e., AAA, BB, C, D).

Evergrande’s original Caa1 rating indicated a substantial credit risk, but its updated credit rating indicates an imminent default with serious concerns about whether investors and creditors will actually recover from a default.

Moody’s also provided a negative outlook on the company as it also downgraded its senior unsecured ratings from Caa2 to C, indicating that the company is likely in default with “little prospect for recovery of principal or interest.”

Investigation

Vernon Litigation Group is conducting an in-depth investigation into The Evergrande Group to determine whether investors have claims against the company, its affiliates, or investment professionals that sold its products to investors.

Contact us today for a confidential, no-cost consultation to determine your rights as an investor in The Evergrande Group, its subsidiaries and/or its affiliates. Call us today at 239-319-4434 to speak with an experienced financial attorney. 

Categories