Following Evergrande, more Chinese real estate companies are defaulting on their debts...

Christopher Joye

Coolabah Capital

Following in the footsteps of Evergrande, our credit analysts have provided the following update on two other Chinese real estate companies that are failing to repay their debts: Fantasia Holdings and Sinic Holdings. On Monday, Fantasia Holdings (Fantasia), a mid-sized residential property developer in China, revealed that it had not repaid a US$206m bond maturing that day. Fantasia also failed to repay a RMB700m (~US$108m equivalent) loan to Country Garden Services Holdings. 

The missed payments come two weeks after Fantasia claimed that “the Company’s operating performance is good with sufficient working capital and no liquidity issue”, and reflects the deterioration of both the operating and financing environment for Chinese property developers as exemplified by China Evergrande’s woes (see our analysis here). 

We have a pretty simple and yet far-reaching Environmental, Social & Governance (ESG) criterion, which is that we cannot invest in securities issued by companies based in non-democratic countries. As basic as this sounds, I am not aware of many (if any) other investors applying it. This prevents us from allocating to bonds issued by any Chinese entities even though they often pay attractive interest rates, seem to be ostensibly low risk, and frequently have appealing growth prospects.

A quick summary of the latest default dramas is enclosed for your benefit.

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Fantasia is a tiny player compared to Evergrande---ranking 60th in China by contracted sales in 1Q21 relative to Evergrande's position as the third biggest developer---and has a significantly smaller quantum of offshore and local bonds outstanding (~US$4.7bn versus Evergrande’s ~$27.6bn according to Bloomberg). Fantastia’s obligations to suppliers and customers are also a fraction of Evergrande's with total liabilities of RMB83bn (relative to RMB1,967bn for Evergrande) as at 30-Jun-21. 

Fantasia has faced a similar cash crunch as real estate sales have slowed and access to external financing sources has been curtailed as a result of the “Three Red Lines” policy that was implemented by the Chinese government in late 2020 (see more about this here). S&P downgraded Fantasia’s credit rating by three notches from B to CCC on 29-Sep-21 due to a lack of access to liquidity to meet its debt repayment obligations, and has subsequently further downgraded the company’s rating to SD following the missed repayment earlier this week.

News of Fantasia’s payment default adds to investor concerns about the outlook for China’s property sector and particularly for highly levered property developers, which comprise roughly a quarter of the country’s high yield bond index. The cost of, and access to, funding has worsened across the sector in recent weeks, creating liquidity problems for many developers that have also experienced a sharp drop-off in sales volumes as a result of the new restrictions. 

While China's central bank has pumped ~US$120bn of liquidity into its financial system, it is unclear if or when the Chinese government will step in to bail-out or “rescue” the sector. If there are further delays in the provision of public support, other over-levered Chinese property developers may likewise fail to meet their payment obligations.

S&P highlights that another Chinese issuer at risk of a near-term default is Sinic Holdings, which is also a mid-sized property developer (ranking 35th by scale in 2020). Sinic has an upcoming US$246m maturity due on 18-Oct and has already failed to pay RMB39m of interest on its onshore debt obligations. A US$75m offshore facility has been accelerated for repayment due to Sinic's severe liquidity issues, and S&P suggests that other facilities may be similarly accelerated. 

S&P downgraded Sinic’s credit rating by four notches from CCC+ to CC on 4-Oct whilst Fitch has also downgraded the company’s rating from CCC to C on 5-Oct. Sinic’s Hong Kong-listed shares have been halted from trading since 20-Sep after they fell by 87%. The company has yet to release any announcements addressing its debt repayment issues...

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Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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