Chinese developer Shimao plans fire sale after downgrade and missed payment

Fears over contagion mount as a company once considered financially sound is running out of cash to pay its debts

Last modified on Tue 11 Jan 2022 01.26 EST

A Chinese developer previously considered financially sound is embarking on a fire sale of assets as the contagion of bad debts built up within China’s bloated housing sector continues to spread.

Shimao Group Holdings, which is in the top dozen Chinese property companies, was plunged into crisis after it said it defaulted a trust loan last week after missing a 645m yuan ($101m) payment that it guaranteed.

Its situation worsened on Monday night when its credit rating was downgraded to junk status by S&P.

After a wild few days of trading, its shares fell 17% on Friday, and then bounced back 20% on Monday amid reports of the fire sale, and then fell again on Tuesday by 5% when it tried to play down the speculation.

Shimao denied in a filing to the Hong Kong stock exchange on Tuesday that it was selling its flagship Shimao International Plaza in Shanghai for more than 10bn yuan ($1.6bn), but did concede that some of its 455bn yuan ($71bn) of assets were up for grabs.

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

However, its financial plight was laid bare by a report from the credit rating agency S&P which said its liquidity was “weak” and that its cash position “will continue to erode for a prolonged period”.

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

The red lines test were introduced by Xi Jinping’s government in Beijing in order to rein in what he sees as excessively risky and speculative borrowing in the property sector.

By reducing the flow of cheap credit to developers, the tougher rules have set off a chain reaction throughout the industry, starting with China’s second-largest property developer Evergrande, which slipped into default on some if its $300bn debts in December.

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

Logan Wright, director of China markets research at Rhodium Group in Hong Kong, said the fundamental problem facing the industry was that falling sales were depriving companies of cash to repay debts piled up in the good times. New home prices fell 0.3% month-on-month in November, the biggest decline since February 2015, and plunged 16.31% by sales value.

“As long as sales continue to decline meaningfully, the risk is that any policy support may not arrive quickly enough to prevent additional defaults, and slowing 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 growing financial pressures.”

S&P estimated that Shimao needed to find 55bn yuan ($8bn) to repay onshore debt maturities this year and its deteriorating credit rating meant it would have to do so from “internal resources” rather than more borrowing.

“The company is facing heightened refinancing risks due to still-tight regulatory conditions, apart from the materially weakened capital markets access,” S&P analysts wrote. “We don’t believe the company will be able to access capital markets in the next six months given the volatility in prices of its capital market instruments, both domestically and offshore.

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

Evergrande, meanwhile, said late on Monday that it had moved out of its Shenzhen headquarters to cut costs.

The company also kept a glimmer of hope alive that its first onshore Chinese yuan bond default might still be avoided by extending until Thursday a deadline for bondholders to agree to a six-month, 4.5bn yuan ($157m) payment deferral.

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