CFLD Default on $530M Bond Highlights Developer Risks From China Credit Crackdown

The impact of China’s crackdown on corporate debt came into clearer view in recent days as a former top 10 mainland developer confirmed last Friday that it was unable to repay holders of $530 million in dollar-denominated bonds that came due on 28 February.

That end-of-month admission by China Fortune Land Development, which has $4.6 billion in offshore debt, was followed on Monday by Fitch Ratings cutting a key issuer rating for the mainland builder to “restricted default”. Competing credit agency Moody’s Investors Service followed on Tuesday by downgrading CFLD’s corporate family rating from Caa1 to Caa3.

In a filing with the Singapore Exchange, the company said it “intends to honor its debt obligations but needs time to address its short term liquidity issues”.

The cash crunch at Beijing-based CFLD is seen as resulting in part from the Three Red Lines policy put in place by China’s central government last year in an attempt to reduce risk to the economy by curtailing lending to highly leveraged companies.

Credit Control Season

CFLD’s bond troubles have surfaced after the company last month warned that it had missed more than RMB 5.3 billion ($820 million) in payments on bank and trust loans, at the same time that other developers have been seeing access to credit disappear.

After the new policies were unveiled in August, Hong Kong heavyweight CK Asset was reported in September to have lost access to credit lines for a project in the southwestern China city of Chengdu.

Then in November, Guangzhou R&F Properties, which struggled with a 62 percent drop in operating income last year, announced the sale of a 70 percent stake in a Guangzhou logistics park to Blackstone for $1.1 billion, which some analysts saw as a way to reduce liabilities.

For CFLD, the restricted default rating by Fitch puts the company into a category associated with an uncured payment default with no initiation of bankruptcy filings or other formal winding-up procedures, coinciding with a continuation of business operations.

Fitch had warned in a note last month that in addition to the $530 million bond that matured in February, CFLD remained on the hook for bonds maturing or with exercisable put options totalling RMB 37 billion through year-end 2021.

Both Fitch and Moody’s announced that they would withdraw all ratings of CFLD and its Singapore-listed affiliate, as the developer was said to have cut off its provision of financial data.

Fall From Grace

Among the club of highly leveraged mainland developers, Beijing-based CFLD stands out for its spectacular decline. Once so well regarded that giant insurer Ping An built up a 25.25 percent stake in the company, in terms of contracted sales CFLD was a top-10 developer in China as late as 2017.

CFLD announced in late 2018 that it had set sights on becoming a top-three developer on the strength of its backing by Ping An, which contributed three senior executives to the builder’s management team.

But by 2020, CFLD had slipped to 83rd among mainland developers by contracted sales, according to CRIC data. The company recorded RMB 54.1 billion in contracted sales last year, which was less than half of the RMB 146 billion that it achieved in 2017.

Fitch estimates that CFLD is owed RMB 50 billion in delayed payments from local governments for development of industrial parks.

In its SGX filing, CFLD said it would “pursue, in a timely manner, a transparent dialogue with all holders of its offshore bonds … with a view to identifying and implementing a consensual resolution that appropriately takes into consideration the interest of all stakeholders”.