By Clare Jim

HONG KONG (Reuters] -Zhongliang Holdings, a Chinese development company, has been trying to obtain bondholder approval to increase the repayment of notes valued at $729 million. The deadline is next week and Zhongliang joins peers in desperate attempts to prevent defaults.

As a result, the Shanghai-based company is unable to sell enough homes amid China’s property slump. It also has difficulty obtaining refinancing for investors due to 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 boost confidence in the overall economy.

Zhongliang would have to pay $1.25 million more for its bonds coupons if Zhongliang is approved to extend the contract by one year. This could be due to weaker currency. 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 are no longer able to refinance offshore, unlike the 2018 fall. This is due to a string of defaults from other issuers in troubled sectors that made it impossible for them raise new debt. This means that repayments will need to transfer from accounts.

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

The deadline for consenting bondholders is Monday night, which has been extended to May 10. 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 now enforcing strict COVID-19 lockdowns. Zhongliang has seen its sales drop 55% over the past four months.

Yau added that it would take longer for sales to recover as it is a long-term fight. Yau further stated that 40% of coastal cities had been affected by the lockdowns.

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

Offshore debt maturities of around $20 billion have become more costly for developers due to a drop of over 6% in the Yuan. Some of these developers are already behind on their payments.

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.

Developers, who had hoped for the market’s bottom in the second quarter of the year, have lowered investor expectations for full-year revenue after experiencing a half-million dollar drop in sales in four months. There has been no rebound in demand in the immediate future.

Guangdong developer says city curbs can not only affect short-term selling but also have a negative impact on long-term purchasing power, making potential buyers less secure about their work.

The increasing difficulties facing developers are despite repeated assurances from Chinese policymakers, regulators, to promote healthy sector development. This includes avoiding defaults and extending 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.”

As we see the dominance of offshore real estate developers on the default ratio, I think there will definitely be increased concerns regarding repayment capability.

Another listed developer executive has deferred its dollars bond payments until next year. He said that the weaker yuan would have an enormous long-term affect on their offshore debt restructuring discussions, as it will be more costly.

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