Unlocking liquidity amid China’s real estate crisis

The debt crisis in China’s property sector continues to wipe out billions of dollars of stock market value. The scale of the problems at China Evergrande, the country’s second-biggest developer, has knocked 90% off its stock price over the past 12 months and eroded confidence in companies across the sector, slowing sales and cutting off access to essential financing. The property slump even triggered a warning from the US Federal Reserve that the turmoil could spill over into the US economy.[1]

Without cash coming in to service their debt, many more developers are at risk of defaulting.

Regulators are working hard to prevent the Evergrande crisis from becoming a systemic problem, but a restructuring of this magnitude will take months – if not years – to put together.

The China property saga is a reminder of the risks of excessive leverage. When liquidity dries up, even the most valuable assets are heavily discounted if they cannot be easily monetised or financed.

At an individual level, investors who borrow too heavily on margin against volatile assets – such as shares in Chinese property companies – run the risk of being asked to top up the collateral if its value falls below a certain trigger point.

Margin risks

Private bank customers can also face margin calls if their banks change their lending policies. Many wealth managers no longer accept stocks and bonds from at-risk developers as collateral for margin lending.

For long-term investors, margin calls can turn a temporary squeeze into a permanent problem, forcing them to liquidate assets at distressed prices.

EquitiesFirst offers an alternative solution to accredited investors, sophisticated investors, professional investors, and otherwise qualified investors who have sufficient knowledge and experience in entering into securities financing transactions. For such investors, a sale and repurchase agreement with the firm enables shareholders to release liquidity from their portfolio while retaining upside potential. EquitiesFirst takes a long-term approach to every relationship, and has a 100% track record of returning the shares at the end of the agreed term.

A loan from EquitiesFirst allows such investors to effectively set a floor on the value of their investment while at the same time raising fully flexible funding at attractive terms. In a worst-case scenario in which they are unable to repay the non-recourse loan from EquitiesFirst, the most a borrower can lose is the shares they pledged.

Our private ownership and long-term investment philosophy are especially important in volatile periods, allowing EquitiesFirst to offer more competitive interest rates and loan-to-value ratios than private banks and other traditional lenders that need to report to shareholders on a quarterly basis.


[1] https://www.federalreserve.gov/publications/files/financial-stability-report-20211108.pdf