Top 20 mainland developer R&F Property had a RMB 6 billion corporate bond plan officially terminated by the Shanghai Exchange last week, despite a trend toward mainland regulators re-opening domestic bond issues for real estate companies.
The canceled notes, which were to have been brokered by China Merchants Securities and CITIC Securities, were named 2018 Leasing Housing Special Corporate Bonds for Non-Public Issuance. According to mainland real estate site Guandian, the bond was first tagged by the Shanghai Exchange as “suspended” early on May 29th before being finally cancelled last week.
Although new issues of domestic bonds have been climbing since June, China’s property developers, especially the smaller players, still face difficulties regarding funding, according to a report by credit ratings agency Moody’s. Despite the setback, R&F appears undiscouraged, as the company applied to issue another RMB 13 billion corporate bond one day after the RMB 6 billion plan was cancelled.
R&F Property’s RMB 6 Bil Corporate Bond was Cancelled
Shanghai Exchange didn’t reveal the reason for canceling the planned sale, however, on the same day that R&F’s sale was shot down, another real estate developer, Hopson Development, also had an RMB 3.1 billion bond plan terminated.
R&F had applied for final consideration of its planned bond sale under the Exchange’s procedures which allow companies to submit additional documents for further auditing and verifying, and provide the opportunity to gain approval for the sale plan if additional information overcomes the Exchange’s earlier concerns.
According to R&F’s interim report, the company issued RMB 23 billion in domestic corporate bonds in the first half of 2018 with interest rates ranging from 3.48 percent to 5.70 percent and RMB14.53 billion domestic non-public bonds ranging from 4.39 percent to 7.50 percent.
The new RMB 13 billion debt issued by R&F Properties last Thursday was jointly brokered by China Merchant Securities, CITIC Securities, Huatai Securities, and GF Securities. The ten-year corporate bond is intended to partially refinance notes issued in 2016, which totalled RMB 21.85 billion.
The bond information platform of Shanghai Exchange showed that R&F Properties has successfully issued an RMB 20 billion three-year bond in this May. However, the company’s debt and financing cost has continued to grow. The interim report showed that R&F’s operating cash flow in the first half was RMB -8.38 billion in the first half.
Beside the negative cash flow, R&F Property also saw its net debt increase to RMB 123.28 billion at the end of June from RMB 110.03 billion at 31 December 2017. Net debt to total equity ratio increased to 187.5 percent at 30 June 2018 from 169.6 percent at 31 December 2017 and the cost for financing climbed by 184 percent.
At the beginning of the year, the developer’s CEO, Li Sze lin, guaranteed that its sales would reach RMB 130 billion in 2018, however, during the first half of the year the R&F only reached 43.82 percent of that goal.
R&F Buying Properties While It Has Negative Cash Flow
Although the company’s debt has continued to mount, and as it faces rising financing costs, the Guangzhou-based developer still actively acquired projects from its rival developers around the world this year. Earlier in January, R&F bought the still uncompleted One Nine Elms project in London from Dalian Wanda Group for £59 million (then $81.5 million).
Three months later, R&F purchased the 670,000-square-metre Haihang Shoufu (海航首府), residential and commercial project in the Hainan provincial capital of Haikou from HNA for approximately RMB 5.7 billion ($905 million) in April.
China’s Debt Cutting Campaign
R&F’s bond termination is the not the only case of bond termination and suspension during the Chinese government’s ongoing campaign against excessive debt. According to a report on mainland real estate website Winshang, in the five months ending May 31st the Shanghai Exchange has suspended nine real estate company’s corporate bonds worth a total of RMB 48.4 billion.
Affected developers include R&F, Hopson Development, Country Garden, Fantasia Holdings, Fullsun Group, Future Land Holdings, HNA Hotels, Suzhou New District Hi-Tech, and Shanghai Powerlong Group.
During the first five months of this year, Country Garden had its RMB 20 billion private equity bond suspended at the end of May. Credit Suisse said the termination of the Country Garden bond was mainly because the Chinese regulator wanted to tighten the financing of offshore registered companies.
According to statistics revealed by the Shanghai Exchange, in the first five months of this year, there were about 78 applications for issuing corporate bonds by real estate developers, among which 33 applications were approved, accounting for less than half. The remaining 38 were marked unfinished while only seven bonds were terminated or rejected.
Since the beginning of 2017, real estate companies in China have experienced pressure from the government to deleverage. In 2017, the Shanghai and Shenzhen exchanges issued a total of 42 bonds backing real estate companies, down 89.26 percent from the 391 bond issuances by developers in 2016. The amount of money raised through these bond sales also dropped — sliding 91.5 percent from RMB 657.88 billion in 2016 to RMB 55.58 billion in 2017.