According to news linked by. MS. NYT Alexandra Stevenson , in a Hong Kong courtroom on Monday, a bankruptcy judge
could force Evergrande to liquidate and pay creditors who owe tens of billions of dollars.
Evergrande's liquidation was previously unimaginable . For two decades, it was a reference in China to capitalism. It was one of China's most successful companies, driving the country's economic growth.
How can a company that was the darling of the Chinese government be filling the bankruptcy queue?
I often say that there are two situations that break a company: lack of sales and excess sales. In a situation of low sales, analysts tend to see problems from afar, which accumulate and are easily identified in their balance sheets. Problems due to excess sales cause the greatest losses to creditors , as in good times credit flows unrestricted, and no bank executive seems to have the alarm on for possible problems.
In every business, there is danger in excess growth and, in the case of Evergrande, years of excessive expansion left it financially vulnerable and, when it defaulted , it had more than US$300 billion in overdue accounts.
How did this happen?
In a growth company, its financing can come from two sources: from capital generated by sales or from third-party capital . Therefore, if a company wants to grow inorganically, it issues debt. If a company wants to grow organically , it expects sales to finance it . The fact is that companies are not very good at projecting future scenarios within a matrix of probabilities, and I confess that it is something really difficult to do, but in the face of difficulty, the old advice applies: Don't risk what you can't lose to earn what you don't need to earn, difficult advice to adopt especially in times of excess liquidity.
Why didn't analysts see the possible default in Evergrande ?
My theory is that banks have the best and most technical analysts , graduated from the best schools. So they see the risk , but the capital market is an extremely competitive market , and it's hard to say no to a client when your biggest competitor is issuing tens of millions in new debt to the same client.
In Hong Kong, lawyers for Evergrande and a group of its creditors argued for more than a year about how to settle billions of dollars in debt the company owes them. Whatever the names at this meeting, it is certain that companies with high growth are always the favorites of employees, governments and creditors. But when something goes wrong, the friendship is cut short with broken hearts and torn pockets.
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