China Evergrande Group

The negative outlook reflects our expectation that Evergrande's liquidity may continue to deteriorate over the next six months, as its short-term maturities continue to surge. It also reflects the likely material decline in Evergrande's margin as the company speeds up its contracted sales at the expense of profitability. We may lower the rating if Evergrande's liquidity does not improve such that its liquidity sources can cover its uses. This could happen if Evergrande fails to enhance its capital structure and lower its short-term financing, including trust loans, to below the current level of about 47% of outstanding debt, or if the company fails to undertake nondebt fundraising. We could also downgrade Evergrande if the company engages in substantial debt-funded land

...China Evergrande Group's uneven capital structure with huge short-term obligations remains the key rating constraint. In our view, Evergrande's imbalanced capital structure remains the root cause for its weaker-than-peer liquidity profile. Evergrande has substantially used short-term obligations such as trust loans to fund growth and it continues to rely on them upon refinancing. The fact that the company stepped up its property project acquisitions in the secondary market in the first half of 2020 and consolidated the project short-term debt has worsened the situation. Its short-term maturities further surged by 6% to an enormous Chinese renminbi (RMB) 396 billion as of end June, making up over 47% of its total debt. That said, with Chinese government measures reining in developers' leverage and liquidity weaknesses, there is a reasonable likelihood that Evergrande may prioritize deploying cash inflow to address its capital structure. We expect the possibility of a liquidity crunch to...

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