Moody’s Sees Further Fallout After Mainland Developer Slips into RMB 1B Default

Credit ratings agency Moody’s Investors Service this week has downgraded its outlook for Hong Kong-listed developer Wuzhou International Holdings Limited as it predicted that the Jiangsu-based industrial specialist would default on $300 million in offshore bonds.

The downgrade comes after Wuzhou chairman Shu Cecheng, who was selected as Real Estate Entrepreneur of the Year in 2014 by international accounting firm Ernst and Young, admitted in a statement to the stock exchange on July 5^th that the developer’s board had declared an event of default. The announcement highlighted that the company had failed to pay $7.5 million in principal due on notes issued in 2013, and that the company had defaulted on a total of RMB 1 billion ($150 million) in loans.

Now five of China’s largest financial institutions have filed civil petitions seeking payment of RMB 484 million.

Domestic Lawsuits Lead to Offshore Defaults

According to Wuzhou’s July 5^th announcement, branches of China Huarong Asset Management are suing the company for a combined RMB 200 million, while Shanghai Lvdi Asset Management is pursuing RMB 140 million. Branches of Bank of East Asia (China) Ltd in Nanjing and Wuxi are suing Wuzhou for a combined RMB 144 million.

These civil filings, according to Wuzhou, make the company unable to meet its US dollar obligations to holders of its $300 million in offshore notes issued 26 September 2013.

“The downgrade of Wuzhou’s CFR (Corporate Family Rating) and senior unsecured ratings to Ca reflects our expectation that the company will default on its repayment on $300 million senior unsecured notes when it is accelerated, triggered by its default in its other debt, and that bondholders will likely face lower recovery levels,” says Stephanie Lau, a Moody’s Vice President and Senior Analyst.

Media Reports Allege Financial Malfeasance

The downgrade comes after Wuzhou chairman Shu Cecheng admitted in a statement to the stock exchange on June 14^th that the developer is “experiencing financial shortage and that the Company has defaulted in some of its payment obligations,” however, Shu reassured investors at the time that, “the Board is not aware of any petition for the winding-up of the Company or any of its subsidiaries.”

Media reports in recent months have highlighted allegations of financial malfeasance at the developer, whose second-largest shareholder is Sun Hongbing, younger brother of Sunac China Holdings chairman Sun Hongbin.

A report on Sina.com indicated that some 577 investors had accused Wuzhou of raising some RMB 205 million ($31 million) to develop a 20,000 square metre wholesale distribution centre in eastern Jiangsu that never appeared. Shu and Wuzhou have denied any wrongdoing and refute media reports. The accounts of malfeasance have not yet been resolved by the local authorities, Wuzhou’s specialty is building wholesale markets, with the group having 41 projects in Jiangsu, Zhejiang, Shandong, Hubei, Yunnan, Heilongjiang, Jilin, Henan, Liaoning, Chongqing and Fujian by the end of 2017.

Moody’s Predicts Dire Times

In its review of Wuzhou’s credit outlook, Moody’s said that it does not expect the company to be able to meet its obligations, given its reported cash on hand of RMB346 million at the end of 2017. The Jiangu developer’s difficulties come as more analysts predict trouble for the nation’s real estate sector. China Orient Asset Management, one of China’s four major “bad asset banks” predicted lat week that the amount of bad loans to the country’s real estate industry will increase by at least 20 percent this year.

With Wuzhou’s stock price having dropped some 94 percent since the beginning of 2018 leaving its market cap now at HK$264 million, it is also unlikely to be able to receive new financing, and the credit agency said that “bondholders will face a low level of recovery.”