Back in the good old days - early 2007 - bankers from Merrill Lynch, Deutsche Bank and other financial giants placed their bets on a 48-year-old property tycoon who was supposed to be China's next billionaire.
They lent his company $400 million, encouraged him to acquire large tracts of land and in early 2008 promoted a proposed $2.1 billion public stock offering by the company, the Evergrande Real Estate Group, in Hong Kong.
One year later, China's housing market has collapsed, Evergrande is mired in debt and the Wall Street bankers are facing huge losses because the company never sold stock to the public.
Now, analysts say, Evergrande has become a symbol of China's go-go era of investing, when international bankers, private equity deal makers and hedge fund managers rushed here hoping to cash in on the world's biggest building boom.
By making short-term and sometimes hasty bets on China's property market, analysts say, some of the world's biggest financial institutions may have lost as much as $10 billion.
"They were greedy," says Andy Xie, an independent economist who once served as Morgan Stanley's chief economist in China.
"They were all in a hurry to make quick money in the stock market. So they were telling developers to go out and buy more land," he says. "They ruined a lot of good companies."
While the scale of the property downturn is still unclear - sales have rebounded slightly after falling more than 50 percent in some big cities - investment in big property projects has stalled.
What is clear is that the real estate boom was fueled in part by foreign investors, who over the last four years pumped tens of billions of dollars into the Chinese property market, hoping to snap up office buildings, luxury villas and stakes in big developers.
A Morgan Stanley real estate fund bought a tower in Shanghai for more than $240 million; the Carlyle Group acquired luxury villas; and in 2008 J. P. Morgan Asset Management held a 12 percent stake in R&F Properties, a big Chinese developer.
To earn big returns, many global investors used complex offshore investment vehicles, like convertible bonds and preferred equity, which gave them tax advantages and allowed them to more easily bypass Beijing's strict controls on investing in Chinese companies listed overseas. Often the investments were routed through places like the Cayman Islands or the British Virgin Islands.
A favorite investment play was the pre-initial public offering deal. Flush with capital, foreign investors would issue convertible bonds through an offshore entity as a way to invest hundreds of millions of dollars in a Chinese property developer. When the developer was ready to sell stock in Hong Kong, it would pay back the initial investment or bond by giving the foreign investor pre-I.P.O. shares at a discount.
Analysts say that foreign investors grew increasingly aggressive about such deals, sometimes failing to weigh the risks.
The investors would typically find a developer, pump huge amounts of capital into the company through the offshore investment vehicles, encourage the developer to use the money to amass a huge land bank to increase the company's value, then prepare the developer for a Hong Kong stock offering. Less than a year after the stock offering, many investors planned to exit the deal by selling their Hong Kong shares at a huge profit.
Investors also hoped to gain from China's currency, the yuan, which was gaining against the dollar and enticing even more speculative capital into the property market.
"Some of the convertible bonds were very complicated," says Richard Sun, a partner in the Hong Kong office of PricewaterhouseCoopers.
The strategy was encouraged by blockbuster stock offerings in Hong Kong in which Chinese property developers raised billions of dollars over the last five years. In 2007, for instance, with China becoming the world's hottest stock offering market, Chinese developers raised a record $8.3 billion, according to PricewaterhouseCoopers.
In one of the biggest deals that year, Country Garden, a developer taken public by Morgan Stanley, raised $1.9 billion. The 26-year-old daughter of the founder quickly became the richest person in China, at least on paper, worth an estimated $16 billion that year, according to Forbes magazine.
The biggest pre-offering investment deal was for Evergrande, based in Guangdong province and controlled by Xu Jiayin, a respected entrepreneur.
Evergrande, which was aggressively building mammoth properties like the Royal Scenic complex in Guangzhou, raised hundreds of millions of dollars from foreign investors and then started buying large tracts of land all over the country.
When the company marketed its public stock offering in 2008, backers said that Evergrande's offering would top Google's $1.7 billion offering in 2004 and that the company's founder, Mr. Xu, would become China's richest man, with a net worth approaching $7 billion.
But Chinese government efforts to control a housing bubble helped kill the offering by slowing housing sales - and therefore developer profits. Also, Hong Kong's booming stock market began to weaken after a spectacular multiyear run.
By withdrawing the offering, Evergrande was forced to go back to foreign investors, seeking capital to pay down its huge debt, much of which it owed from its land purchases. The company says it has borrowed $1.8 billion, much of it from foreign investors like Merrill Lynch, Deutsche Bank and Credit Suisse.
Merrill Lynch, Deutsche Bank, Credit Suisse and Evergrande all declined to be interviewed.
Analysts say the company moved too aggressively.
"Actually, it is a big adventure," Wei Bo, a real estate analyst at Central China Securities, says, alluding to the company's huge debt. "Evergrande risked everything in a single venture: I.P.O. With an I.P.O., Evergrande would be hugely financed. But before it got financed, Evergrande had already expanded too fast."
Many other developers took the same path. Mr. Sun at PricewaterhouseCoopers estimates that 15 to 20 Chinese developers were waiting to go public when the initial public offering market crashed, and that foreign investors had about $4 billion invested in those companies.
Other property investors have also suffered, because share prices for publicly listed developers have crashed, with the shares of some big developers dropping as much as 80 percent from their highs a year ago.
With large debts but meager sales, many developers are facing severe cash flow problems. Some foreign investors are renegotiating the preoffering deals, helping the companies raise extra cash or seeking an exit from an ugly market.
And that is putting even greater pressure on the developers, which need to find the capital to repay the bank or bondholders.
"Many developers are now or will soon be in default," says Jack Rodman, a specialist in distressed property who is a senior adviser for King & Wood, the big Chinese law firm, trying to help creditors manage offshore real estate deals. "Many deals were syndicated, so there are huge creditor meetings going on."
He says that because so many deals were made offshore, unwinding them is proving difficult.
The creditors in many of these deals are big United States-based private equity funds, hedge funds and nearly all the major Wall Street banks.
Developers have a measure of strength because China's state-controlled banks did not sell off their loans to investors as securities, as might be done in the West - and the banks can afford to be patient. But if housing sales do not pick up over the next year, the developers and the banks could both face a much more serious problem.
Bryan Southergill, head of Asia real estate investing at J. P. Morgan, says almost all real estate markets globally are down substantially from the recent highs, and many are distressed. There are few bright spots, he says, just degrees of bad.
He says many private equity investors are on their way home, having lost huge amounts of money. With the initial public offering market essentially shut down because of depressed share prices, and some of China's biggest developers looking at stocks that are down 80 percent after a spectacular ride, foreign investors are counting their losses.
"Now, a lot of investors are trapped," Mr. Southergill says of the private equity investors. "Those that invested all their capital at the top of the market in 2007 have it worst."
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