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debt crisis, bond default and investor risks

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The Emerald Bay residential project developed by China Evergrande in the Tuen Mun district of the New Territories in Hong Kong, China, on Friday, July 23, 2021.

Lam Yik | Bloomberg | Getty Images

Chinese property giant Evergrande is on the brink of collapse, and analysts warn the potential fallout could have far-reaching implications that spill outside China’s borders.

“Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” says Mark Williams, chief Asia economist at Capital Economics.

Here’s how bad its problems are, and what’s in store for investors.

How did we get here?

Evergrande’s collapse would be the biggest test that China’s financial system has faced in years.

Mark Williams

Capital Economics, chief Asia economist

Banks have also responded to its deteriorating cash flow. Some in Hong Kong, including HSBC and Standard Chartered, have declined to extend new loans to buyers of two uncompleted Evergrande residential projects, said Reuters.

Ratings agencies have repeatedly downgraded the firm, citing its liquidity problems. Evergrande’s problems intensified last year when China introduced rules to rein in the borrowing costs of developers. Those measures place a cap on debt in relation to a firm’s cash flows, assets and capital levels.

Its share price plunged nearly 80% so far this year, and trading of its bonds was repeatedly halted by Chinese stock exchanges in the past weeks.

What does Evergrande do?

Evergrande is everywhere. Its main business is in real estate, and it’s China’s second-largest property developer by sales.

  • Evergrande owns more than 1,300 real estate projects in over 280 cities in China.
  • Its property services management arm is involved in nearly 2,800 projects across more than 310 cities in China.
  • The company has seven units dabbling in a wide range of industries, including electric vehicles, health-care services, consumer products, video and television production units and even a theme park.
  • The firm says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year, according to its website.
  • Evergrande’s shares and bonds are included in indexes across Asia.

Who will be affected?

The pool of affected parties include banks, suppliers, home-buyers and investors.

Evergrande warned this week its escalating troubles could lead to broader default risks.

It said that if it can’t repay its debt, it may lead to a situation of “cross default” — where a default triggered in one situation may spread to other obligations, leading to broader contagion.

A banking failure triggered by the collapse of major property developers was the single most likely scenario that could lead to a hard landing in China.

Mark Williams

Capital Economics, chief Asia economist

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In fact, sentiment is already spreading to Asia high yield bonds. Yields on Asian offshore bonds, dominated by property firms, have spiked to an average of 13%, according to TS Lombard.

That also means offshore investors are at the losing end, the research firm said in a note last week.

“The company’s guarantee to deliver all pre-sold projects is likely to lead to overseas stakeholders seeing little, if anything, from the ultimate sale of a developer’s assets in the event of a bailout,” said TS Lombard.

“Hence the prospect of an unequal swap, where the interests of on-shore lenders – households and banks – are protected at the expense of equity and off-shore bondholders,” the note said.

3. Suppliers

The implications of Evergrande’s failure could also reverberate through to other industries if suppliers are not paid. According to S&P Global Ratings, Evergrande might be “trying to persuade” its suppliers and contractors to accept physical properties as payment — in a bid to preserve cash for loan repayments.

I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande.

Dan Wang

economist, Hang Seng Bank

In an August report, S&P estimated that over the next 12 months, Evergrande will have over 240 billion yuan ($37.16 billion) of bills and trade payables from contractors to settle — around 100 billion yuan of that amount is due this year. 

A paint supplier to Evergrande, Shanghai-listed Skshu Paint, said in a filing that the real estate firm repaid part of its debt in properties – and uncompleted ones at that.

Ratings agency Fitch said banks may also have indirect exposure to Evergrande’s suppliers — the developer’s trade payables stood at 667 billion Chinese yuan, according to Fitch analysis.

Is Evergrande too big to fail?

The government is likely to step in due to how important Evergrande is, according to analysts.

“Evergrande is such an important real estate developer, and it would be a strong signal if anything happened to it,” said Dan Wang, an economist at Hang Seng Bank. “I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande.”

But a restructuring could be more likely, according to other analysts.

“The most likely endgame is now a managed restructuring in which other developers take over Evergrande’s uncompleted projects in exchange for a share of its land bank,” Williams of Capital Economics said in a note last week.

It’s likely that the government will prioritize homebuyers and banks over other parties, he said.

“Policymakers’ main priority would be the households that have handed over deposits for properties that haven’t yet been finished. The company’s other creditors would suffer,” Williams wrote.

Investment bank Natixis said the Chinese government will avoid “systemic risks” in the lead-up to the 2022 National Congress of the Chinese Communist Party, given its historical importance.

“However, this would also imply China Evergrande’s debt crisis may snowball down the road,” the bank said in a note, adding that economic growth will not mitigate financial losses as was the case in the past.

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N26 triples valuation to $9 billion, now worth more than Commerzbank

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N26’s logo seen displayed on a smartphone.

Rafael Henrique | SOPA Images | LightRocket via Getty Images

LONDON — German digital bank N26 said on Tuesday it has raised $900 million in a new funding round that values the firm at $9 billion.

That’s nearly three times N26’s valuation in its last private fundraising round and means it’s now worth slightly more than Commerzbank, Germany’s second-largest lender. Frankfurt-listed Commerzbank has a market cap of 7.6 billion euros ($8.8 billion).

N26, which counts billionaires Peter Thiel and Li Ka-Shing as investors, raised the fresh cash from Third Point, the hedge fund led by U.S. billionaire investor Dan Loeb, and Coatue, while Dragoneer also invested.

Founded in 2013, N26 is one of several start-ups in Europe seeking to challenge established banks with app-based checking accounts and little to no fees. Competitors include Revolut, which was recently valued at $33 billion, and Monzo.

Maximilian Tayenthal, N26’s founder and co-CEO, said the company plans to spend the extra cash on hiring 1,000 people globally and on launching new features like cryptocurrency trading.

“We want to bring in more people with a focus on product, technology and security,” Tayenthal told CNBC in an interview.

IPO ambitions

N26 now has 7 million customers across Europe and the U.S. and is on track to process $90 billion in transactions this year. The company recently acquired a banking license in Brazil, with a team of 40 employees already on the ground in São Paulo. N26 expects to roll out its app publicly in the country within the next year, Tayenthal said.

N26 now has enough “financial leeway” to prepare for an initial public offering, Tayenthal said, adding that he expects the firm to be “structurally IPO-ready” within the next 12 to 18 months.

“We have no hurry to go public,” Tayenthal said. “With increasing profitability, the kind of money we are raising right now, it really takes away any time pressure.”

With plenty of money available in private equity markets, many tech companies are opting to stay private for longer. Stripe, for example, raised funds at a $95 billion valuation earlier this year, making it one of the most valuable start-ups in the U.S.

Several European fintechs have managed to reach multibillion-dollar valuations amid surging investment activity. Revolut was recently valued at $33 billion in a funding round led by SoftBank, for example.

However, some investors have expressed concern about their ability to make a profit.

N26 is still loss-making, racking up losses of 216.9 million euros in 2019. Its European business lost 110 million euros in 2020, down from 165 million a year earlier. Tayenthal said N26 isn’t under pressure from investors to make a profit anytime soon.

Growing pains

Like other fintech companies, N26 has dealt with growing pains lately. The firm faced outcry from staff at its Berlin office last year, who at the time said that trust in management was at an “all-time low.”

Meanwhile, N26 was fined $5 million by BaFin, Germany’s financial services regulator, for being late to submit suspicious activity reports that are used by authorities to investigate money laundering.

On Tuesday, the bank said it had reached an agreement with BaFin to limit how many customers it onboards each month to a maximum of 50,000 to 70,000. The watchdog is expected to publish the decision in an upcoming order, N26 said.

Tayenthal warned the move is likely to slow N26’s growth significantly in the short term.

“For a couple of months, it will be material to the business,” he said.

As for work culture, Tayenthal says the firm has worked to improve employee representation at the company over the past year. The company has also begun to foster a shift toward flexible work during the Covid-19 pandemic, he added.

“We were actually very strong believers in having everyone in the office as much as possible. We are moving away from that,” Tayenthal said.

“There [are] obviously certain roles where you need to be in the office more regularly. And we also believe in bringing people together occasionally, but we are going to move to a more flexible model.”

N26 isn’t the only fintech embracing remote work. Revolut has said it will allow employees to work overseas for up to 60 days a year. Such moves are in contrast with major Wall Street banks like JPMorgan and Goldman Sachs, which are encouraging workers to return to the office. Some big European lenders are taking a more flexible approach.

N26 said it would expand its staff equity ownership scheme to cover all employees. Germany last year unveiled plans to reform its rules on employee stock options, a typical perk at many tech start-ups.

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Vestas to install prototype of ‘most powerful wind turbine’

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The shadow of a turbine from a wind farm is seen on a field in Brandenburg, Germany. As technology develops, the size of wind turbines is increasing.

Patrick Pleul | picture alliance | Getty Images

Vestas has announced plans to install a prototype of its 15 megawatt offshore wind turbine at a facility in Denmark.

In a statement, the company said the prototype, known as V236-15 MW, would be installed in the second half of 2022 at a test center in Western Jutland, Denmark. It is expected to start generating electricity in the fourth quarter of 2022.

The scale of the V236-15 MW is considerable. According to Vestas, it will stand 280-meters tall, with prototype blades measuring 115.5 meters in length. The prototype will be installed onshore in order to make access easier when it comes to testing.

Read more about clean energy from CNBC Pro

The turbine’s production output is expected to be 80 gigawatt hours a year. Vestas said this would be able to power roughly 20,000 European households, displacing over 38,000 metric tons of carbon dioxide in the process.

While Vestas claims its prototype “will be the tallest and most powerful wind turbine in the world once installed,” other companies are also developing their own massive turbines.

In August, MingYang Smart Energy released details of a huge new offshore wind turbine. Dubbed the MySE 16.0-242, MingYang’s turbine will have a height of 264 meters, a rotor diameter of 242 meters and a blade length of 118 meters. Its capacity will be 16 MW.

The Chinese company is aiming to install a prototype in 2023 before starting commercial production the year after.

Meanwhile, at the beginning of October, GE Renewable Energy said its Haliade-X prototype, which has been installed in the Dutch city of Rotterdam, had started to operate at 14 MW.

“The ability to produce more power from a single turbine means fewer turbines need to be installed at each wind farm,” the company said at the time. “In addition to less capital expenditure, this also simplifies operations and maintenance.”

The development of huge wind turbines has generated excitement in some quarters, but there are undoubtedly challenges too.

According to a recent report from industry body WindEurope, European ports will require new infrastructure and significant investment over the next few years to cope with the growth of the region’s offshore wind sector and its turbines.

In its report, published in May, the Brussels-based organization said Europe’s ports would have to invest 6.5 billion euros (around $7.54 billion) by 2030 in order to support the expansion of offshore wind.

Among other things, the report addressed the new reality of bigger turbines and the effect it could have in relation to ports and infrastructure.

“Upgraded or entirely new facilities are needed to host larger turbines and a larger market,” it said.

“They will need to cater for operating and maintaining of a larger fleet (including training facilities), for upcoming decommissioning projects and to host new manufacturing centres for bottom-fixed and floating offshore wind.”

Further to this, ports would need to “expand their land, reinforce quays, enhance their deep-sea harbours and carry out other civil works.”

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Ford to convert British factory into electric vehicle plant

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A general view of the Halewood Ford transmission assembly plant after Ford announced a 230 GBP investment on October 18, 2021 in Halewood, England.

Christopher Furlong | Getty Images

LONDON – Ford announced Monday that it intends to spend $315 million (£230 million) transforming a factory in northwest England into a site that will make components for electric vehicles.

The vehicle transmission facility in Halewood, Merseyside, will be turned into an electric power unit production plant, the U.S. motor giant said.

Ford stressed that the investment is subject to and includes U.K. government support, which reportedly amounts to £30 million.

“This is an important step, marking Ford’s first in-house investment in all-electric vehicle component manufacturing in Europe,” said Stuart Rowley, president of Ford Europe, in a statement.

“It strengthens further our ability to deliver 100% of Ford passenger vehicles in Europe being all-electric and two-thirds of our commercial vehicle sales being all-electric or plug-in hybrid by 2030,” he added.

Ford said it will start making the electric power units at Halewood in mid-2024, adding that it plans to produce around 250,000 of them at the site each year.

Last year, the U.K. government created a £500 million pot to try to persuade electric vehicle manufacturers and battery makers to expand their operations in the U.K. It wants sales of new petrol and diesel cars to end in the U.K. by 2030.

Elsewhere this year, Nissan and Stellantis, the world’s fourth biggest car maker, have also announced electric vehicle investments at their U.K. plants. BMW already makes the electric Mini at a site in Oxford.

U.K. Business Minister Kwasi Kwarteng said in a statement: “Ford’s decision to build its first electric vehicle components in Europe at its Halewood site is further proof that the UK remains one of the best locations in the world for high-quality automotive manufacturing.”

Ford said 500 jobs at the factory will be safeguarded as a result of the investment.

 

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