Developer Shimao’s fire sale, new rating cuts keep China property on edge

A man walks past a wall carrying the logo of Shimao Group, with residential buildings and the financial district of Pudong seen in the background, in Shanghai, China January 1, 2013. Picture taken January 1, 2013. REUTERS/Stringer

HONG KONG, Jan 10 (Reuters) – Shanghai-based developer Shimao has put all its projects on sale, local media reported on Monday, and more Chinese property firms suffered credit rating cuts, leaving markets torn between hopes a stifling cash crunch will begin to ease and fears of a surge in defaults.

Chinese property developers are facing an unprecedented liquidity squeeze due to regulatory curbs on fresh borrowing, leading to a string of offshore debt defaults, credit-rating downgrades and sell-offs in developers’ shares and bonds.

The cash crunch for the sector, which is one of the main contributors to the China’s economic output, is expected to intensify in the days ahead with a wall of repayment obligations looming in the next few months.

A glimmer of hope stems from steps the authorities have taken recently to provide some relief.

China Evergrande Group (3333.HK), the world’s most indebted developer at the centre of the sector’s debt crisis, is seeking a six-month delay in the redemption and coupon payments of a 4.5 billion yuan ($157 million) bond. read more

The outcome of the company’s proposal after a meeting with the bondholders is expected as soon as Monday.

Evergrande is struggling to repay more than $300 billion in liabilities, including nearly $20 billion of offshore bonds deemed in cross-default by ratings agencies last month after it missed payments. read more

“It’s going to be the peak of repayment period and we’ll see more developers default,” said Kington Lin, managing director of Asset Management Department at Canfield Securities Limited.

Shimao Group Holdings (0813.HK), which defaulted on a trust loan last week, has put on sale all of its real estate projects, including both residential and commercial properties, Caixin reported over the weekend. read more

The developer has struck a preliminary deal with a Chinese state-owned company to sell its commercial property Shimao International Plaza Shanghai for more than 10 billion yuan, the report said.

The company did not respond to a request for comment.

Daiwa predicted in a research report a vicious liquidity cycle given the recent negative news, even though the firm said it was not in debt servicing default.

Shimao unit Shanghai Shimao Construction said on Friday it was in talks with China Credit Trust to resolve a $101 million defaulted loan payment. The missed payment would not accelerate payment requests in the open bond market, it added.

“We believe negative publicity will erode the confidence of home buyers and investors,” Daiwa said.

“This, in turn, would negatively impact Shimao’s future refinancing activities and contract sales prospects and lead to further deteriorating cash flows and liquidity.”

Moody’s Investors Service on Monday cut Shimao corporate family rating deeper into the junk category, citing its “weakening access to funding and large near-term debt maturities” and kept it on review for a further downgrade.

Shimao shares ended up 19% on Monday, but its bonds due in January 2027 was down nearly 20 basis points. An index of China high-yield debt (.MERACYC), which is dominated by developer issuers, hit a new low.

GROWING DEFAULT RISK

The amount of maturing offshore bonds issued by Chinese property developers will almost double from $10.2 billion in the fourth quarter last year to $19.8 billion in this quarter and $18.5 billion in the next, according to brokerage Nomura.

While the risk of more property developers defaulting on their payment obligations has grown, there are some hopes that the recent government measures will help the sector.

Reuters reported last week that China will make it easier for state-backed property developers to buy up distressed assets of debt-laden private peers, another step by policymakers to avert a liquidity crisis in the sector. read more

“The market is watching how many SOEs (state-owned enterprises) will get more M&A loans to help the developers in distress,” Canfield Securities’ Lin said.

For now, however, more developers are getting hit with credit rating cuts.

Moody’s and Fitch downgraded Yuzhou Group Holdings Company Ltd (1628.HK) due to increased refinancing risks.

Separately, small developer Modern Land (1107.HK), which has missed payment for its 12.85% notes due Oct. 25, 2021, said in a filing on Monday it has received notices from certain noteholders demanding early repayment of their senior notes.

The developer said it has been discussing a waiver with these creditors and has appointed financial advisers to formulate a plan. It is also in talks on a restructuring plan for $1.3 billion of its offshore bonds, the firm added.

Modern Land shares, which have been suspended since Oct. 21, sank 40% on Monday to HK$0.23, a historical low.

Reporting by Clare Jim and Donny Kwok in Hong Kong, Samuel Shen in Shanghai; additional reporting by Marc Jones in London; Editing by Kim Coghill, Shri Navaratnam and Tomasz Janowski

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