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Chinese real estate group Shimao feels the sector’s liquidity crisis is chilling

In late September, another Chinese real estate developer’s bond prices told another story as traders around the world became more vigilant due to the liquidity crisis at Evergrande.

Named after the duo of father and son who have been running the company since 2001, Shimao, based in Shanghai, was rated investment grade by Fitch and considered a safe bet.

But a few months later, the bond traded for $ 1 for 63 cents, and companies with market capital close to RMB 22 billion ($ 3.5 billion) are valuable after being sucked into the sale of the real estate bond market. I was forced to sell my assets. It hit China’s largest offshore borrower.

Shimao’s fate highlights the vulnerability of Chinese real estate companies to the sudden loss of market confidence after the collapse of Evergrande. Today, a wave of top developers are struggling to refinance and are forced to quickly dispose of their assets for their next repayment.

“It’s very difficult for almost every privately owned developer, not just Shimao, to refinance on any channel,” said Iris Chen, a credit analyst at Nomura, based in Hong Kong.

Evergrande had a hard time completing the asset sale. In January, US investment company Oaktree Capital took control of one of Hong Kong’s projects as the world’s most debt-ridden real estate developer embarked on the largest restructuring in China’s history.

China’s real estate sector is working on a leverage-relief measure introduced by Beijing in 2020, which has contributed to the slump in real estate and the economic slowdown.

The Xi Jinping administration has eased its stance on real estate and lowered interest rates and mortgage rates for the first time since April 2020 in order to avoid a serious real estate recession.

This measure is a small part of the overall financing of China’s real estate, but has helped calm the offshore bond market, one of the most widely used health signals in the international market. ..

The Ice Data Services Index, which tracks China’s high yield bonds in the international market, which reached the highest yield of 30% since the financial crisis in November, is currently trading at an effective yield of 22%.

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Kenneth Ho, Head of Asian Credit Strategy Research at Goldman Sachs, said the 2022 default rate will follow 28% and remain high at 19% this year. last year.

“The fact that the dollar bond market is very stressed reflects the fact that policy makers tightened in a relatively short period of time,” he said.

Shimao said in an interim report in 2021 that there are 424 projects in more than 110 cities across China, with land banks concentrated in the Guangdong-Hong Kong-Macau region and the Yangtze River Delta.

By November Shimao had been downgraded to junk. In December, Shimao was forced to embark on a huge asset sale to raise cash, despite guarantees that the business was “normal.” Analysts estimate that half of the year is RMB11.7 billion and the second is RMB11.7 billion.

Line graph of US dollar cents showing Shimao bonds sold out

In early January, China Credit Trust, which provided a trust loan on behalf of a group in mainland China, defaulted in a letter to investors after one of Shimao’s units missed payment of RMB645 million. I wrote that I had fallen. debt.

Shimao’s bonds, which mature in July, were trading at $ 1.63 and were trading at face value until October.

Chinese state-owned companies are buying assets from underfunded developers, and Shimao sells Hyatt on the Bund, one of Shanghai’s major assets, to state-owned company Shanghai Land, giving Hong Kong investors commercial real estate. Has been sold. According to an investor contacted about this issue, Kong Kong.

Another developer, Agile Group, sold its stake in a joint venture in Guangzhou last month to the state-owned China Overseas Land and Investment, a real estate conglomerate.

“Simao is very active in solving the problem. We’ve seen a variety of assets we want to sell,” said investors, taking the company’s approach to Evergrande, the second-largest offshore bond issuer in the sector. Contrast with Kaisa’s approach. I had a hard time closing the asset sale.

“This isn’t for the show, it’s for the real thing. They’re actually trying to sell their assets to help with the cash flow situation,” he added.

Chen estimates that Shimao will raise about RMB 25 billion from the sale of the asset, which should be sufficient to manage future maturities.

“If market sentiment remains unchanged, funding channels cannot be reopened, and there is no significant policy easing, debt restructuring may ultimately be needed,” Chen said.

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