Chinese Property Developer Faces Debt Default Amid ‘Unprecedented Liquidity Pressure’

Chinese Property Developer Faces Debt Default Amid ‘Unprecedented Liquidity Pressure’
A man works at a construction site of a residential skyscraper in Shanghai on November 29, 2016. (Johannes Eisele/AFP via Getty Images)
Kathleen Li

Evergrande’s debt default last year, kicked off China’s housing market slump that just continues to worsen as widespread COVID-19 curbs weaken buyer confidence and market demand.

With tumbling sales, short-term debts, and a lack of offshore refinancing, Chinese property developers are facing a liquidity crisis.

Skyfame Realty, a private Chinese real estate developer, had all its bonds suspended on the Hong Kong Stock Exchange (HKEX) on June 28 after it failed to pay off a secured loan.
According to a June 26 announcement (pdf), Skyfame Realty (00059. HK) failed to obtain approval for an extension of a secured loan “even after the grace period” and was unable to repay the interest or the outstanding principal.

However, before disclosing the default, the firm revealed on June 16 that it was under “unprecedented liquidity pressure.”

According to China’s National Statistics Bureau, its national housing prosperity index has decreased from 101.18 last May to 95.60 this May, a significant decrease compared to previous years.

Meanwhile, property sales, investment, and new construction activities declined significantly in the first five months of 2022.

Property sales fell 31.5 percent in the first five months compared to the same period last year, while investment and new construction activities dropped by four percent and 30.6 percent, respectively.

Prior to having its bonds suspended in the HKEX due to a cross-default, the Guangzhou-based developer Skyfame Realty announced the default of a secured loan from a financial institution in Hong Kong with an outstanding principal of HK$340 million (about $44.2 million).

Cross-default is a bond indenture or loan agreement provision that puts a borrower in default if the borrower defaults on another obligation, as defined by Investopedia.
On June 15, Skyfame Realty’s share price plunged over 10 percent as the firm said it was unlikely to pay off a Singapore-listed senior note worth $263 million that matures on July 8, citing “unprecedented liquidity pressure.”

The firm added that it was “unable to achieve any expected improvement” after seeking possible solutions, including offshore refinancing.

In addition, Skyfame Realty is also in talks with creditors about repayment of the other Singapore-listed note that matures on Dec.16, 2023, with a principal of $292 million and a 13 percent interest rate.

Industry-wide Defaults

“The real estate industry in China is in a vicious cycle—defaults have severely dampened the confidence of investors and home buyers, resulting in limited external funding and plummeting sales,” Katherine Jiang, a Hong Kong-based financial analyst, told The Epoch Times on June 16.

“Falling sales drive down developers’ operating cash flows and dent the market sentiment, jeopardizing property developers’ ability to access the debt and banking market and significantly affecting their financing cash flow. Home buyers would also delay their purchase and opt for a wait-and-see approach. As a result, property sales will fall further, and [property] prices will also drop.”

Though some Chinese developers have not disclosed their financial situations, data suggests many more are facing a liquidity crunch.

According to Securities Daily, a Chinese state-run media, between June 1 and 15, at least 11 Chinese property developers announced the disposal of their assets totaling over $4.5 billion.

“Since the beginning of 2022, the capital market has still eluded the normal financing needs of the real estate industry, especially all offshore refinancing has been stopped,” Skyfame Realty’s June 15 statement reads.

“A number of principal and interest of certain debts are still mature in 2022, but the [firm] still does not see any sign of improvement in the offshore refinancing environment.”

Skyfame Realty was among the top 100 Chinese property firms in 2021. However, its 2021 annual report (pdf) indicated its losses attributable to shareholders had exceeded $42 million.

“The ‘great era’ of real estate in China has passed. It is still a realistic choice to actively welcome a ‘small era.’ The year 2021 is a watershed in the history of property development in China,” Yu Pan, Chairman of Skyfame Realty, said in the report.

Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is an engineer, chartered in civil and structural engineering in Australia.
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