China’s embattled developers, Evergrande and other property companies, have reportedly shifted billions of dollars in debt to off-balance sheet vehicles, according to recent research from investment bank JPMorgan. Once this additional debt is counted in, the leverage ratios rise distinctly.
Those property developers have utilized the tactic to help comply with new borrowing cap rules introduced by the Chinese regime last year, reported Reuters citing the JPMorgan research.
The bank’s China and Hong Kong property analysts say that Evergrande’s case appears to be the most extreme.
“It is possible that the real gearing could be even higher, as data on some off-balance sheet debt is not publicly available,” the JPMorgan analysts added, noting that the so-called “disguised” debt added up to 55 percent of Evergrande’s overall debt.
Balance sheets usually provide a snapshot of a company’s finances as of the date of publication, showing what it owns and owes.
Evergrande appears to have shifted some of its interest-bearing borrowings to debt held off its balance sheet, as well as to non-debt instruments such as “commercial paper, wealth management products, and perpetual capital securities,” according to the analysts.
They estimate the company’s net gearing was at least 177 percent in the first half of this year, rather than the 100 percent reported.
Net gearing refers to a company’s ratio of debt to equity.
Evergrande reported 572 billion yuan ($88.8 billion) in interest-bearing liabilities as of June 30 in its last financial disclosure (pdf), down about 145 billion yuan ($22.5 billion) from the end of 2020. Interest-bearing debt was reduced primarily through deferred payables to suppliers, Chinese financial outlet Caixin reported on Sept. 22.