China‘s real estate industry was once a gold mine, producing one billionaire after another. Today, it has become a debt trap for shareholders and investors. The industry’s billionaire founders face their day of reckoning.
They must meet payments on a mountain of dollar bonds they issued to international investors, which will mature in the next four years, with outstanding balances of $27.33 billion in 2022, 18, $28 billion in 2023, $19.03 billion in 2024, and $17.99. billion in 2025, according to Chinese data provider Wind.
The super defaulter is China’s richest former billionaire, Evergrande founder and chairman Hui Ka Yan. It has yet to come up with a workable restructuring plan after missing payments on nearly $20 billion in international bonds that were all deemed in default late last year.
Hui is not the first to land on this slippery slope, however. According to Fitch Ratings, 21 Chinese property developers have been trapped in a vicious spiral of debt in recent years. They defaulted on domestic or offshore dollar obligations, or both.
Their method of dealing with their financial difficulties offers a clue as to how this drama might unfold. Tellingly, none of these companies have gone through bankruptcy proceedings, according to Fitch Ratings. Many of them are publicly traded stocks that continue to trade at declining valuations.
Start with Shenzhen-based Kaisa Group. In 2015, it made China’s first offshore default of $1.34 billion in dollar bills, the country’s largest offshore default before the Evergrande debacle in December. Kaisa boss Kwok Ying Shing deftly fended off the 2015 crisis through bond swaps, replacing old bonds with new ones the following year – the same formula Kwok is trying to apply this time around.
“Out-of-court resolutions such as bond swaps and maturity extensions are key post-default resolutions, as some developers may still be able to restore their liquidity position through project divestitures or backing shareholders,” said Shuncheng Zhang, an analyst at fitch Valuations.
Domestic investors have tried to take legal action, filing numerous and lengthy lawsuits in Chinese courts. In one case, as many as 25 domestic lawsuits are pending over missed payments worth 2.48 billion yuan against Shanghai-listed developer Sichuan Languang Development, controlled by Keng Yang. Its default of 11.13 billion yuan last July is the largest on record in China. And it involves more than 30 creditors who have filed a host of lawsuits in Chinese courts.
Instead, the company revealed that total debt, including interest payments, bank loans, borrowings from trust funds and other unspecified financing tools, soared to 25.881 billion yuan at the end of the day. End of november.
A group of four billionaires stand out as double defaulters on both domestic yuan notes and offshore dollar notes. They are Huang Qisen from Tahoe, Wang Guiwu from Tianjin Real Estate, Wang Wenxue from China Fortune Land Development and Lu Zhiqiang from China Oceanwide.
Taking both onshore and offshore defaults into account, Tahoe’s Huang leads the pack with outstanding debts of 10.42 billion yuan ($1.64 billion) in domestic bonds and $1.36 billion in dollar banknotes.
Investors still have hope of getting some of their money back. Fitch analyst Zhange cites data from REDD Intelligence to suggest a recovery rate of around 70% for onshore bondholders based on a 15% discount rate, slightly higher than the recovery rate of 50 to 60% for offshore bondholders. But he cautions: “It is difficult to judge whether a certain recovery rate is good or not. They could be attractive to some distressed bond investors who managed to buy the defaulted bond at a steep discount.
Banks are often reluctant to file legal bankruptcy petitions against such defaulters because most bank loans to property developers are collateral-backed. Banks are also aware that the recovery rate under court-ordered debt restructuring is generally low. Additionally, an out-of-court restructuring can ensure developers continue with normal business operations, making it a preferred choice, notes Fitch analyst Zhang.
These financial calamities in the Chinese real estate space differ in size, shape and tone. A common denominator is timing. The bulk of defaults, whether onshore or offshore, occurred in 2020 and 2021, attributed primarily to tighter policy measures taken by local and central governments to cut off many external funding channels and impose restrictions stricter rules on the industry’s use of funds, such as the famous “three red lines” debt limits.
Chinese securities brokerage firm Essence Securities estimated that of the 14 mainland property developers who failed to repay their dollar obligations, totaling $8.65 billion at the end of 2021, 10 had place last year, involving $6.34 billion.
Debt crisis aside, billionaires being billionaires, some are still capable of generous philanthropic cash contributions. Kaisa’s Kwok Ying Shing earned 19th place in the 2021 Forbes China Philanthropist list, with cash donations of nearly 248 million yuan, including 120 million yuan for rural revitalization in his home province of Guangdong. Whether or not this is a prudent use of his money is up for debate.