Blood in the water

The ‘three red lines’ bring more pain for high-debt property developers


China’s property developers are under pressure

A sea change in how China’s real estate giants get access to capital is reverberating across the property sector. Bond investors are watching closely for signs of stress from the heaviest borrowers.

Last October we reported how shareholders in Evergrande– a heavily leveraged developer from Guangdong – were spooked by social media speculation about a letter sent to the provincial government warning of a default unless it was given approvals for one of its units to launch an IPO (see WiC513).

Evergrande denied the letter had ever existed but the news fed fevered speculation about the company’s future until it did a deal with a group of key creditors, buying some more time to reduce its debts further this year (see WiC518).

Last month it was investors in Greenland, a property heavyweight backed by the Shanghai government, getting the jitters, after real estate agents in the city of Harbin put a notice in newspapers calling for payment of overdue advertising fees.

The money in question was peanuts – just Rmb3.92 million compared with Greenland’s Rmb65 billion ($10 billion) market value last week – but the story sparked fresh fears about its finances, amid a sector struggling with the ‘three red lines’ of borrowing rules introduced by the government (see WiC510).

The policy has sent shockwaves through the industry by disallowing new debt raisings unless developers meet thresholds in their liabilities-to-total assets, net debt-to-equity and cash-to-short-term debt ratios. The impact is extensive: S&P Global Ratings has estimated that just 6.3% of rated developers pass the test on all three thresholds.

Market insiders say that firms with higher-quality land banks and with access to the offshore bond market have the best chance of getting through the year unscathed. But some major names have been blocked from raising capital, including Greenland, which was sitting on Rmb1.2 trillion of debt at the end of last year.

Investors in China have typically been comforted by the presence of state-backed shareholders on the register, seeing them as lenders of the last resort in worst-case situations. That lifeline for Greenland started to look a little less convincing last year when Shanghai Sasac – one of its largest shareholders – said that it wanted to divest some of its stake, hinting at their being less likelihood of full-throated support from the state in future crises.

The wider market was then flustered in the final months of last year by the surprise defaults of various SOEs’ bonds in the Chinese market, including Brilliance Auto and Yongcheng Coal. Suddenly, bailouts from the public purse are looking like less of a sure thing (see WiC520).

Further north from Shanghai in Hebei province, another major developer is in worse trouble. China Fortune was a favourite among investors a few years ago as it built up a substantial land bank in the Xiongan New Area, land near Beijing touted as a new home for government offices relocating out of the capital city (see WiC361). However, like Greenland, it is now categorised in the “red tier” of restricted borrowers under the borrowing rules, reducing its room to raise fresh funds to pay off liabilities that are coming due.

China Fortune’s debt is now estimated at Rmb200 billion or more, with Rmb94 billion in short-term loans maturing by September, CBN reports. Growing speculation about the company’s prospects have seen a downgrading of its rating by credit agencies and a sharp fall in the price of its onshore bonds. Last week it made an announcement on the Shanghai Stock Exchange denying reports in the media that it was on the verge of suspending repayments on its liabilities, although it acknowledged that it was looking to raise new funds to meet its commitments this year. Wang Wenxue, the chairman and largest shareholder, blamed the pandemic for the firm’s financial straits at a series of closed-door meetings but added that a steering committee led by Ping An Insurance and ICBC – the two largest creditors – was working with government officials on a rescue plan.

The irony in China Fortune’s case is that its dependence on local governments for income has been a factor in its financial malaise (see WiC373). Its specialty is building new business zones and industrial parks, typically with municipal governments as leading customers (hence its association with the Xiongan New Area, a much-vaunted new district said to have the personal backing of Xi Jinping, China’s leader). But the company typically has to wait to get paid until businesses move into the parks it builds, generating income for their new owners. Cashflows were already looking constrained before Covid-19 took its grip last year, putting off firms from taking space at the business parks. The pressure has pushed China Fortune’s account receivables to record levels.

One possibility is that it finds a way of convincing the regulators that it shouldn’t be subject to the same restrictions on borrowing as other developers because of its focus on “new industry” projects, often sectors championed by central government policy.

In the meantime, the situation looks perilous. The first challenge is the repayment of a $530 million offshore bond at the end of February, says Keith Chan, HSBC’s Asia-Pacific head of corporate credit research. As is so often the case, there will probably need to be some kind of bailout backed by public money. “The last saviours, if any, are the Hebei provincial government and/or Langfang city government, should they decide to provide last-minute funding support to the group and buy more time for negotiations among various stakeholders,” Chan warned last week.

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