By Clare Jim

HONG KONG (Reuters), – Zhongliang Holdings, a Chinese developer is trying desperately to obtain bondholder approval to extend repayment of notes valued at $729 million. The deadline for this extension falls next week.

The Shanghai-based firm has had difficulty selling enough homes amid China’s property slump. It also struggled with refinance to repay investors due for full redemption of their bonds in May or July.

Zhongliang could default on its bonds, causing investor anxiety about China’s property market. Beijing is trying to increase confidence in China’s wider economy.

Zhongliang could approve Zhongliang to extend for another year. However, Zhongliang, who is already in financial trouble, will need to spend $1.25m more on bond coupons due to the weaker Yuan. Additional repayments costs could increase for other cash-strapped issues with higher debt loads.

Albert Yau Zhongliang Chief Finance Officer, said that the situation was “certainly more serious this time.” He compared current conditions with 2018’s major drop in the yuan.

Developers cannot refinance offshore now, not unlike in 2018. This was due to the series of defaults made by issuers within the troubled sector. Repayments must be transferred to accounts.

Zhongliang contacted holders of the May and July 2022 Notes in April asking them to postpone their maturities so they could exchange their bonds for the next year.

Bondholders will have to consent by Monday at midnight. The deadline was extended starting May 10th. The default could occur if you fail to get 90% approval.

FRESH CHALLENGES

Zhongliang’s poor cashflow has cast a dark cloud. This is because the Chinese city of Shanghai is currently locked down to strict COVID-19 restrictions. Zhongliang sales plunged 55% during the first 4 months of 2022.

Yau stated that sales recovery will likely take longer than expected – this is a long-term struggle. Yau also said that the lockdowns had caused disruption to the business of a developer in 40 percent of coastal cities.

The world’s second-largest economic country is experiencing a slowdown in home sales and weaker currency yuan. This will put pressure on developers of property who already struggle to pay back debt and get new capital.

Developers have found offshore debt maturities for the rest of this year worth $20 billion more costly due to the over 6% fall in the yuan. Many developers defaulted on their obligations earlier in the year.

Sunac China, the third developer to fail to pay dollar bonds in recent months, joined the ranks of other failed developers. Investor concerns over this sector which contributes 25% to the economy are being renewed by Sunac China.

After a plunge of 50% in four months, developers are now expecting a bottoming market in the second half. No demand recovery is expected in the near future.

Guangdong’s developer said that city curbs do not just affect short-term sales, but can also impact long-term buying power and make potential buyers feel insecure about their job prospects.

The developers face mounting difficulties against the backdrop Chinese policymakers’ and regulators’ repeated assurances that they will ensure sector growth by avoiding defaults. They also support banks lending loans.

Gary Ng (Asia Pacific senior economist at Natixis) stated, “It’s indeed a double whammy for them, not just about the weaker revenue, but also on the other side it’s this weaker money plus higher yield.”

I believe there will be greater concerns about repaymentability as we’ve seen an increase in default rates, which are dominated offshore by real estate developers.

Another listed developer executive has delayed paying its dollar bonds until next year because a weaker currency will cause a major long-term problem for its offshore debt restructuring. It will also become more expensive.

Because the restructuring discussions are private, the executive did not want to be identified.