Kaisa Group Holdings may be in danger of becoming the biggest Chinese real estate developer to collapse as a result of the country’s property slump, after the Hong Kong-listed company defaulted on a HK$400 million ($51.6 million) loan on Wednesday.
The troubled home builder has suffered a series of setbacks in recent months which appear to have trapped it between falling home prices, increased regulatory scrutiny and rising unwillingness among bankers to extend or roll over credit for real estate ventures.
Kaisa’s default on the credit facility from HSBC follows the resignation of two of its directors in the last week, as well as the departure of the group’s chairman. The default, combined with the management turnover and government action against the company, raises the possibility that other creditors will demand immediate repayment of loans to the cash-strapped company.
If Kaisa collapses it could deal a serious blow to the efforts of China’s government to gradually rebuild confidence in the real estate market. In March last year the collapse of a minor real estate developer in eastern China triggered widespread fear among lenders and home buyers, and helped contribute to the country’s property slump that has seen home prices fall each month since May 2014.
Loan Repayment Triggered After Execs Resign
According to an announcement dated yesterday to the Hong Kong Stock Exchange, Kaisa’s default came about after chairman Kwok Ying-shing officially left his post on December 31st. The departure of the company co-founder had first been announced on 13 December, but still seems not to have sat well with the company’s creditors.
On Monday the 28th, Kaisa further announced that both Kwok’s vice chairman and the company’s chief financial officer were also resigning effective 29 December.
Kwok’s resignation gave HSBC the option to demand immediate repayment of the loan, and Kaisa apparently did not have the cash available to make good on its obligations to the bank, nor was it able to convince the lender to refrain from exercising its option.
What Makes HSBC Worry
Although Kaisa already had nominated new directors to replace the departing board members, as well as a new chairman, the company has been under financial strain for some time and at the beginning of December it was forced to announce that the Shenzhen government had frozen sales at three of its development projects in the southern Chinese metropolis.
This problem was compounded when, over the weekend of December 20th and 21st, the city forced Kaisa to stop sales at another project in Shenzhen.
The government action is believed to be related to political issues involving the home builder. Kaisa is rumoured to have ties to fallen politburo member Zhou Yongkang, who was arrested on corruption charges last year. Earlier in 2014 the top official of Guangzhou, the capital city of Guangdong province and a close neighbor to Shenzhen, was arrested on corruption charges that included questionable real estate deals.
Now trading in Kaisa’s shares has been halted since 24 December, when they closed at HK$1.60 per share. The company’s stock had already been suspended twice last month and had fallen nearly 50 percent in value since it closed at HK$3.11 per share on November 24th.
The Shenzhen company’s credit also was downgraded from B1 to B3 by Moody’s on 30 December, and the credit ratings agency made it clear that further downgrades could be forthcoming.
Kaisa’s Credit Dominoes Could Start to Fall
While it’s not the first Chinese developer to get into financial trouble in recent months, Kaisa is certainly the biggest to default on a loan during the current downturn.
According to the company’s website, Kaisa achieved contracted sales of RMB17.3 billion ($2.79 billion) in 2012, and in terms of contracted GFA sold, the company ranked 17th in China. Traditionally in China, companies of this scale have been able to renegotiate loans with banks.
But those renegotiations have usually been with government owned lenders in their home country, and China’s developers have been on an international borrowing spree in recent years.
In October last year, Agile Property, successfully renegotiated loans with foreign lenders after the detention of its chairman forced the company to abandon a planned rights issue.
More Defaults on the Way at Kaisa?
Beyond defaulting on the loan from HSBC, Kaisa may have trouble paying back money it owes from other loans and bond issues, and the company admits that it is likely to be under pressure in the days ahead.
In yesterday’s statement to the stock exchange, new chairman Sun Yuenan said that, “The Company is currently assessing the impact of the above default (to HSBC) on other loan facilities of and debt and equity securities issued by the Group which may trigger cross-default under such loan facilities and/or debt and/or equity securities, which may in turn have material adverse impact on the financial position of the Group.”
Basically, there are covenants in other loans and debentures obtained by Kaisa that allow the lender to demand payment in the case that Kaisa defaults on any loan.
The biggest debt obligations that Kaisa has at this time appear to be $500 million in bonds that it sold in March 2013, and another $800 million in notes that it issued in March of that same year.
Both sets of securities slid sharply in trading today, with the $500 million debenture, which is due in 2020, falling to 38.6 cents on the dollar, according to an account in Bloomberg.
Preparing for an Impact Beyond Kaisa
While none of Kaisa’s other lenders have demanded payment yet, the company will be hard pressed to meet its commitments, particularly with a brand new chairman and CFO.
Although Agile was able to pull off a bailout from its major creditors, even with its chairman in detention, HSBC’s unwillingness to work out a deal with Kaisa is a bad sign.
Unless the company can convince the Shenzhen government to allow it to resume sales of it projects in the city (which is estimated to account for as much as 20 percent of Kaisa’s total revenues), then it will be difficult for the developer to convince lenders that it has the cashflow available to meet its commitments.
And should other banks follow HSBC’s lead, then Kaisa will have no choice but to seek protection from its creditors.
Judging the Impact on China’s Property Market
When privately-held Zhejiang Xingrun Real Estate collapsed in the eastern China city of Ningbo last March it raised fears of a credit contagion that effectively shut down domestic bond issues by developers for nearly four months and helped make banks much less willing to lend both to developers and home buyers.
The credit squeeze that ensued contributed to a drop in demand which led to a more than 11 percent decrease in home sales in 2014 compared to the previous year.
Should Kaisa, which is a much larger firm, meet the same fate at Zhejiang Xingrun, then the impact on the market could be felt for months.