Chinese Developer Shimao Plans Discount Sale After Downgrade and Missed Payment | China

A Chinese developer, previously seen as financially sound, is embarking on asset discounting as the contagion of bad debt accumulated in China’s bloated real estate sector continues to spread.

Shimao Group Holdings, one of China’s top dozen real estate companies, was plunged into crisis after it said it defaulted on a fiat loan last week after missing a payment of 645 million yuan (101 million yuan). dollars) that he had guaranteed.

His situation worsened Monday night when his credit rating was lowered to junk status by S&P.

After a few days of mad trading, its shares fell 17% on Friday, then rebounded 20% on Monday amid reports of the clearance sale, then fell again on Tuesday by 5% when they attempted to downplay the clearance sale. speculation.

Shimao on Tuesday denied in a filing on the Hong Kong Stock Exchange that he was selling his flagship Shimao International Plaza in Shanghai for more than 10 billion yuan ($ 1.6 billion), but admitted that part of his 455 billion yuan ($ 71 billion) in assets were up for grabs.

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

However, its financial position was exposed by a report from the S&P rating agency which said its liquidity was “low” and its cash position “will continue to erode for an extended period.”

S&P has placed Shimao at a B- rating, considered junk in financial markets and well below the best investment grade it enjoyed just two months ago when it was one of the Chinese developers who passed the government’s “three red lines” test on the loan. .

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

By reducing the flow of cheap credit to developers, the stricter rules have triggered a chain reaction across the industry, starting with China’s second-largest real estate developer, Evergrande, which defaulted on some of its debts of $ 300 billion in December.

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

Logan Wright, director of research on Chinese markets at Rhodium Group in Hong Kong, said the fundamental problem facing the industry was that declining sales were depriving companies of cash to pay off accumulated debt in good times. . New home prices fell 0.3% month-on-month in November, the biggest drop since February 2015, and plunged 16.31% in sales value.

“As long as sales continue to decline significantly, the risk is that all political support will not come quickly enough to prevent further defaults and slow construction activity and economic growth,” Wright said. “Local governments are facing declining revenues from land sales and they will not be able to offer much help to developers under increasing financial pressures. “

S&P estimated that Shimao needed to find 55 billion yuan ($ 8 billion) to pay off onshore debt maturities this year and the deterioration in its credit rating meant it would have to do so from “internal resources.” Rather than additional loans.

“The company faces heightened refinancing risks due to continued stringent regulatory conditions, aside from significantly weakened access to capital markets,” S&P analysts wrote. “We do not expect the company to be able to access capital markets in the next six months given the volatility of the prices of its capital market instruments, both domestically and internationally.

“While we don’t expect banks to call for early debt repayment, as bank loans are typically secured against project assets, this risk could increase as sales deteriorate. According to industry data, Shimao’s total contract sales in 2021 were around 270 billion yuan ($ 42 billion). This was on the lower end of our forecast… and reflected a more than 60% year-over-year decline in contract sales in December 2021. ”

Evergrande, meanwhile, said Monday evening that he had left his headquarters in Shenzhen to cut costs.

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

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