The Shanghai-based company has struggled to sell enough homes amid China’s long-lasting housing downturn or secure refinancing to pay investors who must repay their obligations in full in May and July.
A default on Zhongliang bonds would heighten investor concerns about China’s property sector as Beijing seeks to restore confidence in the wider economy.
Even if Zhongliang is granted permission to extend for another year, the cash-strapped promoter will have to pay an additional $1.25 million in coupons on its bonds due to the weak yuan. For other cash-strapped and more debt-heavy issuers, the additional redemption costs due to currency swings could be much greater.
“The situation is definitely more serious this time around,” Zhongliang CFO Albert Yau said, comparing the current conditions to the yuan’s last major decline in 2018.
Unlike the tumble of 2018, developers are now unable to refinance overseas after a series of defaults by other issuers in the troubled sector made further debt raising impossible. This means that refunds should be transferred from onshore yuan accounts.
In late April, Zhongliang asked holders of its May and July 2022 bonds to delay the odds by exchanging their bonds for a new issue due next year.
Bondholders have until late Monday to agree, a deadline extended since May 10. Failure to reach 90% approval would likely result in a default.
NEW DFIS
The gloomy outlook for the real estate market, which is now depressed by the strict COVID-19 shutdowns in many Chinese cities, casts a shadow over Zhongliang’s tight cash situation. Zhongliang’s sales fell 55% in the first four months of 2022.
“We expect it will take longer for sales to pick up – it’s a long-term battle,” Yau said, adding that the developer’s operations in 40% of coastal cities have been disrupted due to the storms. lockdowns.
A sharp slowdown in home sales in the world’s second largest economy and a weaker yuan will increase pressure on property developers who are already struggling to repay debt and raise new capital.
A more than 6% fall in the yuan has made the odds of about $20 billion in foreign debt more onerous for the rest of the year for developers, some of whom have already defaulted on their repayment obligations this year.
On Wednesday, Sunac China became the latest to join other promoters who have failed to make dollar bond payments in recent months, renewing investor concerns over the sector which accounts for a quarter of the world’s economy. country.
Promoters, hoping for the market to bottom out in the second quarter, are scaling back investors’ forecasts for full-year sales after recording a 50% drop in the first four months without no rebound in demand is expected in the near future.
A developer based in Guangdong province said the municipal restrictions are not only hurting short-term sales, but also affecting longer-term purchasing power, with potential buyers feeling insecure about their jobs.
The growing challenges for developers come amid repeated assurances from Chinese policymakers and regulators to ensure healthy development of the sector by avoiding defaults and efforts, including banks extending loans.
“It is indeed a double-edged sword that they will face, not only due to declining revenues, but also due to currency weakness and rising yields,” said Gary Ng, senior economist. for Asia-Pacific at Natixis.
“I think there will definitely be more concerns in terms of repayment capacity as we have seen that the default rate, which is dominated by property developers in the offshore market, has increased.”
An executive from another listed developer, which has postponed its dollar bond payments until next year, said a weaker yuan has a big long-term impact on its ongoing offshore debt restructuring. discussion, because it will become much more expensive.
The executive declined to be named because restructuring discussions are private. (Reporting by Clare Jim; editing by Sumeet Chatterjee and Sam Holmes)