S&P Downgrades R&F’s Hong Kong Unit, Likens Payment Extension to Default

Guangzhou R&F Properties may have avoided default and gained an extra six months to repay a $750 million offshore note that came due on Thursday, but S&P Global Ratings has labelled the group’s delaying tactic a default in all but name.

Noteholders granted an extension until 13 July for the cash-strapped mainland developer to pay the remaining principal amount of $608.6 million, even as liquidity issues led R&F Properties to downsize its planned buyback of the debt to $104 million instead of the expected $300 million.

In response, S&P Global on Thursday lowered its long-term issuer credit rating on R&F’s Hong Kong unit, which acts as the group’s offshore financing platform, to “selective default” from CC, citing the unit’s insufficient resources and limited funding options to repay the maturing notes in the absence of the manoeuvre.

“We view the transaction as a distressed restructuring and assess it as tantamount to a default,” the rating agency said in a release.

No Guarantees Here

The Guangzhou-based builder had warned last week that the funds available to settle its tender offer for the offshore notes would be “materially less” than the anticipated $300 million after sales of unspecified assets fell through.

S&P Global noted that investors are being paid less than originally promised due to the six-month maturity extension and that the tender price was 17 percent below par for one of the offer options devised by R&F Properties.

The long-term issuer credit rating on R&F Properties remains CC, the agency said, because the parent company is a keepwell provider of the bond as opposed to a guarantor. A keepwell covenant shows a parent’s willingness to provide support for a subsidiary, but the arrangement provides limited recourse relative to a corporate guarantee.

“We will further review the credit profiles of Guangzhou R&F and subsidiary R&F HK after we reassess the companies’ financial and liquidity positions,” S&P Global said. “We will also reassess Guangzhou R&F’s parent support to R&F HK. The group companies still have sizable onshore and offshore bond maturities, while the group faces several hurdles to substantially improve its weak liquidity.”

Wheeling and Dealing

Hoping to escape a debt-squeeze scenario made famous by its cross-town rivals at China Evergrande Group, R&F Properties has been pulling out the stops to service its liabilities, which include RMB 18 billion in capital-market debt maturing or becoming puttable in 2022.

In early December, the developer agreed to sell its remaining 30 percent interest in a Guangzhou logistics park to US private equity giant Blackstone for RMB 3.4 billion ($540 million).

R&F said at the time that selling out of the logistics park would enable the group “to address its near term maturities, including but not limited to offshore senior notes”. An announcement has yet to be made about completion of the disposal to Blackstone, which acquired the other 70 percent interest in the park last January for $1.1 billion.

In September, R&F’s controlling shareholders worked out a pair of deals that allowed them to loan HK$8 billion ($1.03 billion) to the developer, while potentially pocketing HK$2 billion in change.

A private company controlled by R&F chairman Li Sze-lim and vice chair Zhang Li agreed to sell R&F Property Services HK, a real estate management spinoff of the developer, to cross-town rival Country Garden Services for up to RMB 10 billion. Just four minutes later, R&F Properties announced that its chair and vice chair would be providing the developer with HK$8 billion in financing over the following one to two months.