EVERGRANDE Real Estate Group has cut leverage on its balance sheet over the past two years to a third by classifying some of it as equity, according to analysts’ calculations based on its public filings.

    Evergrande, the most indebted developer among China’s top 10 property firms, is seeking additional funding to expand, and a lower proportion of debt to equity makes it easier and less costly for a company to borrow.

    Evergrande cut the proportion of debt on its balance sheet by issuing so-called perpetual debt instruments and classifying them as equity, corporate filings for 2013 and 2014 show. The developer also increased fair value gains on some of its properties, according to the filings.

    The accounting treatments are legal and not uncommon. But they effectively mask the amount of debt a company actually holds and in Evergrande’s case, they may obscure how highly leveraged it is, analysts say.

    Excessive leverage is not a problem as long as China’s No. 4 property developer manages debt payments and credit markets remain liquid, but analysts say it has a small margin of error if markets dry up or lose momentum or if it runs into liquidity issues.

    “Evergrande needs to rely on short-term loans such as bank and trust lending to refinance when the short-term debt matures. This is risky capital management because banks loosen and tighten lending from time to time and it’s unpredictable,” said Moody’s Investors Service analyst Franco Leung.

    It began issuing perpetuals in 2013, doubling the amount to 52.9 billion yuan (US$8.5 billion) as of end-December, equivalent to nearly half of its equity, corporate filings show. It has the highest value of perpetual use among China’s 10 biggest developers by sales, according to a review of the companies’ 2014 balance sheets.

    Evergrande executives have previously said it has issued perpetuals to finance projects. Asked whether it would issue more this year, chief financial officer Tse Wai Wah told a March 30 earnings briefing: “It depends on market conditions... and market reaction,” he said. (SD-Agencies)