Evergrande’s Grand Finale Won’t Be Pretty for Investors

China’s most indebted property developer needs to sell more apartments to survive, but it also needs to find the cash to build them. In the end, some of that cash will likely come from the government—but that doesn’t mean the company will survive in its current form, or that bondholders will emerge unscathed.

China Evergrande warned Tuesday that it may default on its debts if its liquidity problems worsen. The cash crunch is setting off a vicious cycle—work on some of its projects have been suspended because it failed to pay suppliers and contractors on time. Evergrande has had to pay some of them with apartments instead: It settled around $3.9 billion with suppliers and contractors that way in the past couple of months.

The developer has raised more than $2 billion recently selling assets including a stake in a bank, a shareholding in its water business, and five property projects. More will come but the company is still a long way off from plugging its financial hole. Evergrande had $88 billion of interest-bearing borrowings as of June, a $22 billion reduction from December. But the decrease was offset by an increase in its payables and contract liabilities, mostly obligations owed to home buyers for units it presold. Such payables and contract liabilities together amounted to $180 billion as of June.

Suspended projects aside, the slowing property market is also starting to bite. Evergrande’s contracted sales in July were 13% lower than the same period last year. August will likely be worse as the government has stepped up its effort to cool home prices. Evergrande’s core property business lost $634 million in the first half.

For now, the government will let Evergrande’s scramble for cash continue, as asset sales will cut the developer down to size. The developer’s debt-fueled growth risked creating a “too big to fail” situation that the government is anxious to avoid. Beijing’s curbs on real-estate leverage were what triggered the current credit crunch.

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