Evergrande, The Grande Mess

Welcome to the forty-first Pari Passu newsletter.

Today, we are going to learn more about the restructuring process of a company that has been in the news for some time: Evergrande.

The Beginnings and the Rise

Evergrande Group is a Chinese conglomerate that mainly engages in property development but also has interests in other sectors, including finance, sports, tourism, and electric vehicles. Founded in 1996 by Xu Jiayin, Evergrande grew rapidly during China’s housing boom, becoming the country’s second-largest property developer by sales (also the world’s most indebted real estate company today). Evergrande’s business model relied heavily on borrowing money to acquire land and build projects, then selling homes to customers who often paid well in advance. In turn, Evergrande expanded its market share and generated cash flow, but also exposed it to high financial risks and regulatory pressures.

Evergrande’s rise to become China’s second-largest property developer was fueled by its aggressive expansion strategy and favorable market conditions. The company took advantage of China’s urbanization drive and rising demand for housing, especially in less affluent cities where it had a strong presence. China’s urban population grew from 36% in 2000 to 65% in 2022, significantly aiding Evergrande on its path to entering the Fortune Global 500. Additionally, China’s loose monetary policy and easy access to credit enabled Evergrande to borrow cheaply and leverage its balance sheet, maximizing growth between 2009 and 2020. Over this period, Evergrande's revenue increased from $838mm to $77bn while total assets grew from $9.2bn to $352bn.

The “Three Red Lines” Policy

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