Goldman Sachs and JPMorgan warn of contagion risks from Evergrande’s debt woes

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Goldman Sachs and JPMorgan warn of contagion risks from Evergrande's debt woes

LONDON, Sept 15 (Reuters) – The Evergrande Group debt crisis could pose a contagion risk for the Chinese real estate sector as a whole, Goldman Sachs said in a note published on Wednesday.

The property developer, who has a liability of nearly two trillion yuan ($ 305 billion), is trying to raise funds to pay lenders and suppliers, as he is torn between a controlled collapse and the more distant prospect of a bailout by from Beijing.

“We believe that a major disruption to the company’s property development operations could be very negative for the confidence of domestic property buyers and investors, and could spill over into the broader real estate sector,” wrote Goldman Sachs’ Kenneth Ho and Chakki Ting in the note.

Analysts added that if real estate operations are maintained as a going concern, the contagion margin could be lower.

JPMorgan also warned of the risk of repercussions.

“With recent events accelerating to the downside, we believe additional maneuvers by the government are necessary to avoid potential contagion,” the bank said, adding that it hoped that operations would remain underway to protect the interests of clients and suppliers.

“If politicians follow the government’s guidelines to ensure a stable housing market, we do not expect the company’s impending default to be too disruptive for the sector,” JPMorgan said.

Goldman Sachs analysts said possible options for Evergrande could include a corporate overhaul to ensure continuity of onshore operations, bringing in third parties to invest in the company, and also a potential debt and equity restructuring.

Goldman Sachs said that overseas bond market sentiment in Evergrande could also be affected by prospects for recovery in the context of a debt restructuring.

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