China’s property crisis continues to spread with CIFI Holdings, a Shanghai-based developer which has received government support in securing new financing, disclosing this week that it has defaulted on an onshore trust loan.
Credit intelligence provider Reorg reported Wednesday that CIFI, which is backed by Hong Kong private equity firm RRJ Capital and has often partnered with Henderson Land Development, had missed payment on certain non-standard debt owed by a project company known as Tianjin Xingzhuo Real Estate Development.
“The market sentiment on the local housing market has affected the progress of development and sales of such project, thus affecting the cash distribution of the said investment trust product,” CIFI announced to the exchange later on Wednesday, after chairman Lin Zhong had sent a letter to employees notifying them of the company’s liquidity crunch.
In the last five trading sessions the company’s shares have now lost more than 48 percent of their value, and closed Thursday at HK$0.72 per share.
Run Aground in Tianjin
Holding 31 percent of the Tianjin project company, CIFI said it is “in active discussion” with the financial institution issuing the trust loan to “reach a reasonable solution”.
The project company holds a residential development called CIFI Binhai Jianglai in Tianjin’s Binhai New District, according to Reorg’s Wednesday report.
In a new report shared with Mingtiandi Thursday, Reorg described the trust loan to CIFI’s Tianjin project as “quasi equity, real debt,” and noted that the terms of the financing allow for investors as shareholders to compel the borrower to buy back project shares from the lender if performance terms are not met, citing two sources familiar with the matter.
One of the shareholders in the project, a trust loan company, argued that the Tianjin project’s lack of progress had triggered a share buyback provision and requested payment from the company, said Reorg, citing the sources.
Records from business information portal Tianyancha show that Daye Trust indirectly owns 27 percent of Tianjin Xingzhuo Real Estate Development Co, while Ping An Group owns approximately 42 percent of the project company.
In his letter to senior CIFI staffers chairman Lin Zhong warned of “hardship and ordeal” and called on them to “fight to the end.” The company founder said “although we have more than RMB 30 billion ($4.14 billion) of cash sitting on the books, the overwhelming majority of it could not meet reasonable demand by the company.”
Lin noted that mortgage boycotts have prompted many local authorities to tighten cash withdrawals from escrow accounts, further squeezing liquidity for property developers.
As investors dumped the company shares that day, CIFI tried to downplay its liquidity crisis, noting in its Wednesday exchange filing that the RMB 30 billion in cash mentioned by Lin was “an unaudited approximate amount.” The company said Lin’s statement was only meant to flag that it was not able to tap pre-sales proceeds due to government controls on its escrow accounts.
“For avoidance of doubt, none of the statement in the internal letter implies or represents any inability of the group to pay its debts as they fall due or satisfy the liabilities of the group,” CIFI said. Investors responded by driving the company’s share price down by an additional 16 percent on Thursday.
Govt Support Not Enough
Analysts linked the plight of CIFI, which has avoided default on its publicly-traded debt, and on Wednesday made timely payment on an offshore bond, to ongoing challenges facing even the company’s strongest private developers as the market slows and credit remains tight.
“Sales year-on-year have been improving since June, Shujin Chen, head of China FIG Research at Jefferies, told Mingtiandi in describing the current market situation, noting that 2022 figures built on a low base from last year.
“However, private developers are still struggling to make payments for debts and payables given still weak sales, tightening pre-sales funds, and limited financing channels,” Chen said.
Along with peers Longfor and Country Garden, CIFI is one of roughly half a dozen homebuilders which recently received government support in raising new debt. Last week, the developer issued RMB 1.2 billion in 3.22 percent three-year medium-term notes due Sept. 22, 2025 supported by a 100 percent guarantee from China Bond Insurance Co.
However, there have been signs of a financial strain on the developer.
Last week, Fitch Ratings downgraded CIFI’s rating to ‘BB-’ from ‘BB’ and kept a negative outlook citing the developer’s declining liquidity buffer and higher leverage.
“We estimate that CIFI’s unrestricted cash, excluding cash in the escrow account/short-term debt dropped to 1.0x in 1H22, from 1.4x in 2021, while leverage exceeded our previous forecast and negative rating threshold of 50 percent, reaching 57 percent, from 54 percent. We believe higher than expected cash outflow to joint-venture (JV) projects and large construction commitments have weakened CIFI’s credit profile,” said Fitch analysts led by Rebecca Tang.
At the beginning of this month, CIFI agreed to sell its 60 percent stake in a Fortress Hill project with Wang On Properties to a joint venture of Wang On and Dutch fund manager APG for HK$1.34 billion ($170 million).
In unaudited operating statistics released this month, CIFI reported that its contracted sales for the first eight months of 2022 totalled RMB 94.3 billion, down 47 percent from a year earlier.
CIFI’s interim report released Thursday showed the developer’s net profit declined by 79.7 percent on year to RMB 730.8 million during the first half due to factors including RMB depreciation, a decrease in its share of results of joint ventures, and a decline in gain on investment properties.