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When China Fortune Land Development lost payment of a $ 530 million bond in February, the real estate developer was in no hurry to communicate it to its investors.
“They didn’t even say‘ we defaulted, ’” recalled one of the company’s offshore investors, who only found out through an outside manager. The investor added that advisors to China Fortune, whose bondholders include BlackRock and HSBC, said they should wait for land debt obligations to be met first.
Fortune of China, which builds industrial parks and a further $ 4 billion, is one of the country’s largest companies under pressure to pay back as Beijing tightens credit conditions. With sales of more than $ 100 billion in dollars lent by Chinese companies to international markets this year, global investors are on the verge.
Last year, Chinese companies died with a record $ 7.3 billion in foreign dollars and a value of $ 22.7 billion in so-called renminbi bonds. By 2021, payments of nearly $ 3.3 billion in dollar bonds have been lost, according to rating agency Fitch, or what was expected in a full year before the pandemic.
Among the other names that concern investors are Founding Group of Beijing University, a state-backed conglomerate that owes $ 1 billion in offshore debt and is restructuring.
China Fortune declined to comment.
These pressures are like Beijing seeks balance a strong economic recovery of Covid-19 with high levels of indebtedness. “It is clear that the Chinese government wants a more rational credit market,” said Jimmy Lim, executive director of Modular Asset Management, a hedge fund based in Singapore.
The prospect of defaults has also forced international investors to reassess how much they will receive support from the Chinese government for companies that are expanding financially. Foreign investors have long assumed this Beijing would be rescued state-supported groups.
Concerns about government support have been fueled by the plight of China Huarong Asset Management, the country’s most distressed debt manager, which ten $ 22 billion in debt denominated in dollars. The price of some offshore bonds issued by the group, majority owned by the finance ministry, fell to 57 cents a dollar last month after delaying the publication of its financial results for 2020. The former chair of the ‘company was executed in January for financial crimes.
Huarong bonds themselves are now trading at 66 cents.
According to Refinitiv, Chinese issuers face the largest dollar-denominated bond strike this year at $ 118 billion. But even this is affected by the Rmb7.8 million ($ 1.2 million) of land debt maturing in 2021. The latter figure could have major repercussions for holders of alien bonds, especially if prioritizes land debt restructuring.
“What will happen on the ground will clearly drive what will happen abroad,” said Soo Cheon Lee, founder and investment director of SC Lowy, a distressed Hong Kong-based credit manager. In the case of China Fortune, he added, “even the land boys are struggling to find out what’s going on.”
The restructuring process in China can be slow. More than a fifth of companies that have defaulted since early 2018 have not completed the restructuring, said Shuncheng Zhang, associate director of Chinese corporate research at Fitch.
Zhang said land breaches are usually resolved through Chinese courts, which means they take much longer than extrajudicial agreements usually prefer.
The case of China Fortune has been complicated by the presence of powerful land investors. Ping An, one of the largest insurers in the world, is both an investor and a member of the real estate group’s creditors’ committee. Other committee members include China’s national banking and insurance regulator and the Hebei province government, which has failed to pay China’s fortune to work on infrastructure projects and has helped bring about its non-compliance.
Alien bondholders who collectively have more than $ 1.5 billion in debt to China Fortune have formed their own committee.
Ping An suffered a $ 2.8 billion hit from its exposure to China Fortune through debt and equity during the first quarter. An analyst at a global rating agency said that as a result, regulators could also reconsider the amount of exposure to properties that Chinese insurers should have.
This would further boost developer liquidity, which accounts for the majority of annual issues of Asian high-yield bonds, according to S&P.
Lee of SC Lowy found it ironic the recent increase in lost bond payments, as China’s economic data is fantastic. In spite of everything strong economic growth, he said, Beijing’s reluctance to bailout meant that a recent period of defaults is likely to occur in recent years.
However, Lee said the government would take steps to limit losses for offshore bondholders, as global investors are a major source of dollar funding for Chinese companies.
China, he said, “can’t limit offshore guys, because a lot of China Inc. still needs offshore funding.”
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