China Aoyuan to Default on $1.1B in Offshore Debt Ahead of Restructuring

China Aoyuan Group has become the latest mainland developer to default on its financial obligations, announcing Wednesday that it would not make payments on $1.09 billion in offshore notes scheduled to mature in the next three years, including two sets of bonds coming due within the next four days.

“Having given careful consideration to its liquidity and in order to preserve its limited cash resources and maintain fairness among all of its creditors pending a holistic debt restructuring”, the group will no longer make interest or principal payments on notes maturing on Thursday of this week, on Sunday of next week and in June 2023 and June 2024, Aoyuan said in a filing with the Singapore Exchange, where the dollar bonds are listed.

The Guangzhou-based group, which ranked as China’s 31st largest developer in terms of contracted sales as of the third quarter of 2021, said a continued market downturn and the dampening of purchasers’ confidence had hindered the realisation of inventories and disposal of assets. As a result, unaudited contracted sales in 2021 fell 9 percent year-on-year to RMB 121.03 billion ($19 billion).

“Events of default will occur (or have occurred) under all other offshore financial indebtedness of the group,” Aoyuan chairman Guo Zi Wen said in the filing, noting that management continues to work with advisors on a restructuring proposal to present to creditors and other stakeholders.

Insolvency Proves Contagious

In addition to the four sets of notes mentioned, Aoyuan’s outstanding offshore debt includes a $350 million bond maturing in 2027, according to the group’s interim report for 2021.

The planned restructuring will see Aoyuan join the roster of Chinese real estate firms looking to work through their dollar debt pile, including China Evergrande Group, Kaisa Group Holdings and Modern Land.

Despite Wednesday’s grim news, Hong Kong-listed Aoyuan shares jumped more than 3 percent in Thursday trading, in a session that saw Chinese developers’ stocks rise sharply in price in response to interest rate cuts and reports of eased funding restrictions.

Chinese news site The Paper reported earlier this month that Aoyuan was in talks to sell four or five of its overseas projects at a combined amount of RMB 3 billion.

“Several properties in Canada and Australia may be disposed of,” the developer told The Paper. “All high-quality projects are under negotiation.”

Road to Restructuring

As 2021 drew to a close, a series of unwelcome events had raised doubts about Aoyuan’s continued ability to service debts.

In November, Aoyuan agreed to sell off a redevelopment project in Hong Kong’s Mid-Levels to raise cash, anticipating an estimated loss of HK$176.6 million (now $22.6 million) on the disposal.

On 3 December, business information site Reorg reported that an onshore subsidiary of Aoyuan had proposed to repay investors in RMB 6 billion ($942 million) of its overdue investment products in instalments or with properties such as apartments, office buildings and parking spaces worth at least RMB 9 billion.

Then in late December, Hong Kong hedge fund Nine Masts Capital joined Citibank in taking legal action to recoup more than $131 million owed to them by Aoyuan. The claim arose from “alleged events of default” under a credit agreement that included certain non-payment events disclosed in a company announcement earlier in December.