FOOL me once, shame on you. Fool me twice, shame on me. China’s indebted real estate developers are getting desperate.
Following the epic defaults of China Evergrande Group and Kaisa Group Holdings Ltd, the nation’s two largest high-yield dollar bond issuers, investor sentiment is understandably fragile.
Developers, straining to repay debt, are pulling all stops to get loan extensions. Navigating the treacherous market can test even the cleverest financiers.
The latest uproar is over Guangzhou R&F Properties Co, which had a US$725 million (RM3.02 billion) dollar bond due yesterday.
Ten days before Christmas, the developer asked for a six-month extension. To appeal to bondholders, it claimed to have put aside about US$300 million cash to retire some of the outstanding principal.
Almost all investors agreed to the deal; over two-thirds were even willing to take a 17% haircut to get their cashback.
After the investor vote, Guang- zhou R&F changed course. It turns out the actual amount available is now “materially less” than the US$300 million, with the repurchase amounting to only about US$116 million.
About US$609 million, or more than 80% of the original amount, is now due in July. Some of its investors must feel pretty stupid right now.
While Guangzhou R&F gained six months of breathing room, it could turn out to be a very short-sighted move.
These days, skittish about their exposure, mainland bankers watch developers’ negative news flow and bond prices very carefully.
Builders with a tarnished reputation will have a hard time refinancing debt — or even disposing their assets.
Case in point: Shimao Group Holdings, a large developer which until November still boasted an investment-grade rating at S&P Global Inc.
Since last June, the builder has experienced continuous rumours on delays in payments of trust loans — short-term, high-cost borrowings — hammering both bankers’ confidence, along with its bond prices and apartment sales.
Perhaps prophecies are self-fulfilling: In early January, a trust guaranteed by two of Shimao’s subsidiaries failed to repay. Guangzhou R&F may be wily, but it’s by no means exceptional. In less than four months, we have seen all sorts of shenanigans.
In early October, Fantasia Holdings Group Co, a smallish developer, opened the Pandora’s box by failing to repay a US$206 million bond, even though it had the money — or gave that impression throughout.
Later that month, Kaisa asserted to its investors that it had no wealth management business — there certainly was no such mention in its financial reports.
A few days later, it missed payments on wealth-management products. Meanwhile, Agile Group Holdings Ltd, which has a history of using offshore shell companies to issue off-balance-sheet private bonds, has seen its bond prices plunge because traders are worried it might have private notes due in the next few months, reported Debtwire.
This helps explain why even positive macro policy changes from Beijing can’t overcome the sour mood in the offshore high-yield bond market, which is dominated by developers.
In October, it was Fantasia — not Evergrande — that caused the market’s worst selloff in a decade.
Sentiment worsened in November, when investors questioned how much the industry relied on shadow financing — and were sceptical that developers would ever be upfront about it.
The bloodshed has continued into the new year, even as Beijing moved to ease its pressure on industry finances.
The clever ones might be victims of their own cleverness, the Chinese like to say. This ancient wisdom is now playing out in the developers’ world. Reputation matters. Don’t ruin it. — Bloomberg
- This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.