© Reuters. FILE PHOTO: Chinese yuan banknotes are seen in this illustrative photo taken July 26, 2010 in Beijing. Reuters/Jason Lee
HONG KONG (Reuters) – Chinese developer Zhongliang Holdings is scrambling to get approval from bondholders to extend repayments on $729 million worth of notes ahead of a key deadline next week, joining a rush to avoid default on offshore debt peer ranks.
The Shanghai-based company has struggled to sell enough homes or get refinancing to pay investors who will fully redeem the bonds in May and July amid a persistent downturn in Chinese real estate.
Zhongliang’s bond default will deepen investor concerns about China’s real estate sector as Beijing seeks to boost confidence in the broader economy.
Even if Zhongliang is allowed to extend for another year, the developer, teetering under a cash crunch, will now have to pay an additional $1.25 million in bond coupons due to the devaluation of the yuan. For other cash-strapped issuers with heavier debt loads, the additional repayment costs due to currency fluctuations can be much greater.
“This time the situation will definitely be more severe,” said Zhongliang Chief Financial Officer Albert Yau, comparing the current situation to the last sharp fall in the yuan in 2018.
Unlike the 2018 slump, developers are now unable to refinance offshore after a series of defaults by other issuers in the troubled industry made it impossible to raise new debt. This means that repayments need to be transferred out of the account.
Zhongliang asked holders of its May and July 2022 notes in late April to defer maturities by swapping the bonds for newly issued bonds due next year.
Bondholders had to give their consent late on Monday, and the deadline was extended from May 10. Failure to obtain 90% approval may result in default.
Casting a cloud over Zhongliang’s tight cash flow is a grim outlook for the property market, which is now suppressed by the strict COVID-19 lockdown in many Chinese cities. Zhongliang’s sales plunged 55% in the first four months of 2022.
“We expect sales to take longer to recover — it’s a long-term battle,” Yau said, adding that developers’ operations in 40 percent of coastal cities were disrupted by the lockdown.
A sharp slowdown in home sales in the world’s second-largest economy and a weaker yuan will put pressure on property developers already struggling to pay down debt and raise new capital.
The more than 6 percent depreciation of the yuan has made the maturity of offshore debt worth about $20 billion for the rest of the year more expensive for developers, some of which have defaulted on their repayments this year.
Sunac China on Wednesday became the latest of other developers to fail to pay dollar bonds in recent months, renewing investor concerns about an industry that accounts for a quarter of the country’s economy.
Developers, hoping the market bottomed out in the second quarter, are lowering investors’ expectations for full-year sales after a 50% slump in the first four months, with no rebound in demand anytime soon.
A developer in Guangdong province said city restrictions would not only hurt short-term sales but also long-term purchasing power, with potential buyers feeling insecure about their jobs.
Developers face mounting challenges against a backdrop of repeated assurances from Chinese policymakers and regulators to ensure the industry’s health through efforts to avoid defaults and include bank lending.
“They’re really going to have a double whammy, not just revenue weakness, but currency weakness and rising yields,” said Gary Ng, senior economist for Asia Pacific at Natixis.
“I think there will definitely be more concerns around repayment capacity as we have seen an increase in default rates led by property developers in the offshore market.”
An executive at another listed developer, which has delayed dollar bond payments until next year, said a devaluation of the yuan has a significant long-term impact on the restructuring of its offshore debt it is discussing, as it will become more expensive.
The executive declined to be named because restructuring discussions are taking place in private.