Beijing-based builder Modern Land China failed to repay the principal and interest due on a $250-million dollar bond due Monday, making it the latest Chinese developer to miss dollar bond payments reflecting deepening financial stress in the real estate sector.
Modern Land told the Singapore stock exchange, where the bond is listed, that it was not able to repay the entire outstanding principal and accrued interest of its dollar-denominated 12.85 percent senior notes due 2021 as the company struggles with cash crunch.
“Owing to unexpected liquidity issues arising from the adverse impact of a number of factors including the macroeconomic environment, the real estate industry environment and the COVID-19 pandemic faced by the Group recently, the repayment arrangement of the principal amount of the notes and the accrued but unpaid interest thereon was not met on that day,” the disclosure released on Tuesday read.
Modern Land’s financial failure, which comes one week after fellow mid-sized mainland developer Sinic Holdings suffered its own $250 million default, has banking analysts pointing to more overstretched developers struggling to meet their financial obligations in the days ahead.
In Modern Land’s statement, its president Zhang Peng, said the Hong Kong-listed company will continue to evaluate its financial condition and cash position, noting that further announcements will be made on the bond payment status, without providing a timetable or other details.
“The company is working with its legal counsel Sidley Austin and expects to engage independent financial advisors soon to assist it in formulating an overall plan taking into account the interests of onshore and offshore stakeholders,” the disclosure read.
On 11 October, the Beijing developer had asked investors for a three-month bond payment extension and proposed to repay a portion of the debt to avoid a default, but in a statement last week Modern Land scrapped the scheme, stating that the plan “will not be in the best interest of the company and other stakeholders.”
That earlier proposal to defer repayment of offshore bonds prompted international debt watchers to downgrade the developer’s credit rating, with Fitch Ratings slashing it to C from B previously, while Moody’s Investors Service downgraded the rating to Caa2 from B2.
“The review for downgrade reflects the uncertainty over the company’s ability to repay all of its debt maturity in the coming 6-12 months,” Moody’s Vice President and Senior Analyst Celine Yang said in an Oct. 11 note.
Noting that, although Modern Land had reported RMB 13.6 billion ($2.13 billion) in cash at the end of June, Fitch said in a 14 October report that its access to cash for bond repayments remained uncertain and interpreted the proposed consent solicitation as a move to avoid default.
Trading in Modern Land’s shares and securities has remained halted since it was suspended on 21 October.
Developer Struggle Session Continues
Modern Land’s default came amid a series of missed bond repayments among its peers, including the default by Hong Kong-listed Fantasia Holdings earlier this month when it failed to repay $205.7 million principal due Oct. 5 out of the total $500-million issuance.
Alicia García Herrero, chief economist for Asia Pacific at French financial services firm Natixis, warned that financial markets should brace for more revelations of missed bond repayments from Chinese developers this year as market data shows many developers still having failed to bring their finances within China’s “three red lines” for creditworthiness.
“There are around 20 developers which do not comply with any of the three red lines, many of which [are] small. Some of them are bound to default. Others would be absorbed by larger healthier groups, possibly state-owned developers,” she told Mingtiandi on Tuesday.
Just last week, Sinic Holdings Group also defaulted on a $250 million offshore bond payment while Hong Kong-based China Properties failed to settle $226 million in notes which matured on 15 October.
In a bid to manage the sector’s financial health, the Chinese government had put in place the “three red lines” threshold last year, setting limits on debt ratios for property developers and making it more difficult for heavily indebted companies to access credit and refinance debts.
The sector’s liquidity crisis will likely keep bond yield spreads high for some time but the debt contagion will likely be limited to Asian real estate markets, Herrero added.
Meanwhile, China Evergrande, the mainland’s second-largest and most indebted developer, reportedly avoided a default last week when it transferred $83.5 million in fund needed to meet its obligations on an offshore bond, according to a Reuters report. Evergrande also announced on Sunday that it had recommenced work on 10 residential projects in six cities around Guangdong province.
Pimfha Chandhapradi provided additional reporting for this story.