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Buttressing Greenland – a bailout in China’s distressed property sector -Breaking

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© Reuters. A Greenland Holdings Corp. Ltd. building is seen by people in Beijing on March 11, 2022. REUTERS/Tingshu Wang

By Engen Tham and Xie Yu

SHANGHAI/HONG KONG – Greenland Holdings Corp Ltd is a prominent Shanghai-based Chinese state-backed developer of property responsible for marquees projects abroad.

Sources told Reuters that the bond was in danger of being defaulted on by a 500 million dollar offshore bond. In December Shanghai authorities urged local SOEs to rescue it and purchase new Greenland bonds.

The first time that Chinese SOEs were directly instructed to take part in an offering of property sector bonds for Greenland, the details of which have not been reported, is when the financial crisis and bailout occurred. This highlights the need to be more proactive and focused by authorities to reduce the risks associated with the industry.

This is the result.

Greenland, China’s No. Highly leveraged and a property developer, Greenland was swept up by a debt crisis that affected the entire sector. This came amid concerns that an uncontrolled developer collapse would derail China’s second largest economy.

As many peers it was also reeling under tighter restrictions on the debt ratios that were implemented in January 2021. This resulted in liquidity shortages across the sector.

According to two individuals with knowledge of Greenland’s financial status, many long-term lenders like CITIC Bank had reduced their lending in October. Credit rating agencies downgraded Greenland’s debt ratings, which further exacerbated the situation.

The company sought new financing through trust and leasing companies. However, the steep rise in interest rates became a problem.

Greenland took more dramatic steps in the fourth quarter. They reduced real estate-related staff by 30%, and placed more strategic focus on infrastructure projects, which accounted for half its revenue.

However, the 500-million bond was not able to pay for the possibility that some holders might want to redeem their bonds about a year before the deadline of Dec. 16.

The sources for the article weren’t authorized to talk to media, and they spoke under condition of anonymity.

Greenland stated in a statement that it had always repaid all its debts, domestic and international. It also maintained low financing costs and said its plan to reduce its liabilities was moving along smoothly. CITIC Bank didn’t respond to our requests for comment.

BLACK KNIGHTS

According to one source, Shanghai municipality authorities became concerned about Greenland’s financial position during the fourth quarter and asked its lenders to extend repayments to Greenland. This was to preserve existing relationships rather than to end them.

According to the four persons briefed, the meeting was called by the Shanghai government’s State Asset Administrator, who ordered seven SOE representatives to purchase new Greenland dollar bonds.

According to two of the sources, Shanghai Municipal Investment Group and Bank of Shanghai were included in the list of SOEs.

Greenland disclosed that $350 million had been raised in its dollar bond issue on December 14. It was due August 2022, and carried a coupon of 7.974%. This rare deal with a developer bond came at a time where sector concerns had reduced new note issuance. According to two sources, the SOES were the sole purchasers.

Greenland announced three days later that it had paid 85.9% off the bond’s $500 million face value, after put options were exercised.

Requests for comment were not received from the Shanghai government’s State Asset Administrator, Shanghai municipality government, and four SOEs.

China’s crisis in the property sector has presented a serious problem for President Xi Jinping who seeks to win an unprecedented third term.

One hand, it wants financial discipline to be imposed on an industry that is known for its unbridled borrowing. This sector accounts for 25% of China’s GDP. It cannot afford to slow down growth and fuel unrest.

China Evergrande Group has defaulted on its bonds, making it the most indebted company in the world. It also had some other debts of around $300 billion. Authorities have softened their initial belief that market forces would be able to prevail.

Rules relating to M&A and capital raising in the sector have been relaxed and developers have been given easier access to pre-sale funds held in escrow accounts. Premier Li Keqiang, at the annual meeting of parliament last week, indicated more easing.

According to sources, local authorities encouraged SOEs purchase of developer assets. It is not clear if SOEs per se have been ordered to acquire.

SHIMAO TOO

Shimao Group Holdings was a Shanghai municipality official who helped the developer put its entire property on sale to help repay its debt.

According to a different person, 27 of Shimao’s creditors were asked for their lending rights and not to publicly undercut Shimao’s creditworthiness. According to the individual, “Everyone was stone-faced and no one had any reactions.”

Shimao has not responded to any requests for comment.

Greenland however appears to have seen more government intervention than the majority of other developers. Reuters spoke to sources that were not able to explain why, but they noted Greenland has high-profile projects and is supported by the state.

The company recently constructed Sydney’s highest residential tower. It also has billions in projects across London, New York and Los Angeles. Its projects in China include the construction of China’s tallest residential tower and is active in building bridges, tunnels, and highways.

One government advisor stated that government-backed credit support is now the best option to reduce sector risk.

It is becoming more common to believe that size will determine which firms receive government support.

It remains to be determined how much the government will continue supporting Greenland. They are still facing financial challenges. The company has $190 billion of total debts and outstanding bonds in the amount $7.1 billion. $3.7 billion will mature by year’s end, according to Refinitiv data.

According to sources, the order for SOEs supporting Greenland was only related to the purchase of $350 million new debt.

Greenland is in danger of falling further into financial trouble at one SOE, and the possible fallout from that, if it does.

One person familiar with the situation said that the written instructions with the Shanghai SASAC letterhead ordering the purchase of Greenland bonds were being stored in safe custody in the event Greenland defaults. In this case, SOE officials will be called to answer for their actions.

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