Monday, August 15

Chinese developer Shimao plans a forced sale after downgrade and late payment | China

A previously considered financially sound Chinese developer is embarking on an asset sell-off as the contagion of accumulated bad debts within China’s bloated real estate sector continues to spread.

Shimao Group Holdings, which is among the top twelve Chinese real estate companies, was mired in a crisis after it said it defaulted on a trust loan last week after missing a 645 million yuan ($ 101 million) payment it guaranteed. .

Their situation worsened Monday night when S&P downgraded its credit rating to junk.

After a few wild days of trading, his shares fell 17% on Friday, then rallied 20% on Monday amid reports of the forced sale, and then fell again Tuesday by 5% when he tried to minimize speculation. .

Shimao denied in a presentation to the Hong Kong Stock Exchange on Tuesday it was selling its flagship Shimao International Plaza in Shanghai for more than 10 billion yuan ($ 1.6 billion), but admitted that some of its 455 billion yuan ($ 71 billion) of assets were at stake.

The statement advised investors “not to trust market rumors regarding the group” and that “the information should only be based on the company’s official announcement.”

However, its difficult financial situation was exposed by a report from the credit rating agency S&P that said its liquidity was “weak” and that its cash position “will continue to erode over a prolonged period.”

S&P moved Shimao to a B- rating, considered junk in financial markets and well below the highest investment grade it enjoyed just two months ago when it was one of the Chinese developers that passed the “three red lines test.” “from the government on loans. .

The red lines test was introduced by Xi Jinping’s government in Beijing to curb what he sees as excessively risky and speculative borrowing in real estate.

By reducing the flow of cheap credit for developers, the stricter rules have set off an industry-wide chain reaction, starting with China’s second-largest real estate developer, Evergrande, defaulting on some of its debts. $ 300 billion in December.

But despite official insistence that the problem is limited to a few rags, the contagion appears to be spreading and accelerated by falling home prices and sales.

Logan Wright, director of China market research at Rhodium Group in Hong Kong, said the fundamental problem facing the industry is that falling sales deprive companies of cash to pay off debts accumulated in good times. New home prices fell 0.3% month-on-month in November, the biggest drop since February 2015, and plummeted 16.31% in sales value.

“As long as sales continue to decline significantly, the risk is that any political support will not come quickly enough to avoid additional defaults and a slowdown in construction activity and economic growth,” Wright said. “Local governments are facing declining revenues from land sales and will not be able to offer much help to developers under mounting financial pressures.”

S&P estimated that Shimao needed to find 55 billion yuan ($ 8 billion) to pay off domestic debt this year, and its deteriorating credit rating meant it would have to do so with “internal resources” rather than more loans.

“The company faces increased refinancing risks due to still tight regulatory conditions, in addition to materially weakened access to capital markets,” S&P analysts wrote. “We do not believe that the company will be able to access the capital markets in the next six months given the volatility of the prices of its capital market instruments, both domestically and offshore.

“While we do not anticipate that banks will request prepayment of debt, given that bank loans are generally secured by project assets, such risk could increase as sales deteriorate. According to industry data, Shimao’s total contracted sales in 2021 were approximately 270 billion yuan ($ 42 billion). This was at the lower end of our forecast … and reflected a more than 60% year-on-year drop in contracted sales in December 2021. “

Meanwhile, Evergrande said late Monday that it had moved from its Shenzhen headquarters to cut costs.

The company also kept alive the hope that its first Chinese yuan bond default could be avoided by extending the deadline for bondholders to agree to a six-month payment deferral of 4.5 billion yuan (157 million yuan) until Thursday. Dollars).

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