Sunac Meets Investors to Seek Second Extension on $600M in Domestic Bonds

Sunac China Holdings is asking holders of RMB 4 billion ($600 million) of its domestic notes to accept a second rescheduling of payments as the mainland developer struggles to raise cash due to weak sales.

Representatives of Sunac Real Estate, the primary domestic vehicle of the Hong Kong-listed developer, are meeting with the bondholders on Tuesday and Wednesday to discuss trimming instalment payments due on 30 June and in September, which had already been delayed from earlier this year, as the firm says its sales revenue is not sufficient to cover the RMB 400 million payment due on Thursday, a Monday filing with the Shanghai Stock Exchange showed.

“As of now, the company is facing short-term financial pressure, and it is expected that it will not be able to raise sufficient funds for repayment of the instalment before June 30, 2022,” the firm had said in a separate disclosure on Friday. “The company has proposed to adjust the upcoming repayment schedule of the bonds.”

Sunac’s potential default on renminbi-denominated bonds is the latest indication of how the liquidity crunch facing Chinese property developers remains “worrisome” according to Gary Ng, economist for Asia Pacific at Natixis.

Great Uncertainty

Sunac warned that there is “great uncertainty” regarding its ability to fulfill its commitment this week, with that weakness prompting it to request the revised repayment scheme. The request comes after the developer had reached an agreement with creditors in March to extend repayment of the RMB 4 billion notes originally due on 1 April, by rescheduling it into a set of six quarterly instalments over the next 18 months.

The mainland builder settled the initial payment of 10 percent of the principal in time for the 15 May deadline, and is now due to pay the next 10 percent this Thursday.

In the meeting with bondholders on Tuesday and Wednesday, Sunac is proposing to cut the payment due 30 June in half to RMB 200 million. The developer also is requesting that the next quarterly instalment, which is due on 30 September, be reduced to RMB 400 million from the RMB 600 million specified in the previous agreement.

The next quarterly instalments equivalent to 15 percent of the principal or RMB 600 million starting 31 December 2022 until 30 June of next year will stay as originally planned, while the the last tranche falling on 30 September 2023 will be increased to 30 percent of the principal from 20 percent previously.

“In view of the current situation of the issuer’s operation, in order to steadily advance the redemption of the principal and interest of the current bond, the bondholders are hereby requested to agree to change the content of the redemption date in the original proposal,” Sunac said in the statement.

The Tianjin-based firm saw its contracted sales slump by over 59 percent during the first five months of 2022, compared to a year earlier, to total just RMB 98.78 billion.

Sunac, which is controlled by tycoon Sun Hongbin, first warned of the potential onshore bond default in March, and also missed the 31 March deadline for publishing its audited financial statements for 2021.

More Onshore Defaults Seen

“As the pressure continues to mount, troubled property developers will still prefer to repay onshore bonds first, but it may eventually become a situation that they cannot repay both with weak property sales and difficulties to refinance,” Natixis’ Ng said.

He attributed the sector’s persistent liquidity woes to “inadequate help” from the government as measures such as lower mortgage rates have failed to revive consumer demand. Last month, China cut its benchmark interest rate for mortgages by a record 15 basis points to 4.45 percent from 4.6 percent previously in a bid to boost the struggling housing sector.

Public data released this month shows new home sales by China’s 100 biggest property developers fell by 59 percent in May compared to a year ago, which was a still sharper decline than the 58 percent drop seen in April. Home prices in major Chinese cities also dipped in May for the second time this year, falling by 0.1 percent after sliding by 0.2 percent decline in April.

“Second, the credit polarization within the property sector is widening further,” Ng added. “It means investors may continue to see more defaults at the weaker end of the spectrum even though the general health of the sector may have improved,” he said.

Sunac’s onshore bond struggles show how the financial crisis in the mainland’s real estate market continues to evolve, with non-government-backed players caught between slow sales and limited access to fresh funding.

“Private property developers are clearly still at the center stage of credit risk in China,” Ng said.

Scrambling For Cash

Sunac’s proposal for a second extension on its onshore bonds came after the developer last month failed to pay $29.5 million in interest on a $741.6 million offshore bond due in October 2023. Also during May, Sunac warned creditors that it is likely to miss deadlines for coupon payments on three other offshore bond series.

In a statement last month, Sunac said it is accelerating sales and payment collection to raise cash, as well as disposing of assets, seeking equity financing and obtaining interest-free loans from its controlling shareholder and chairman Sun Hongbin.

Fitch Ratings and S&P Global Ratings this year withdrew their long-term issuer credit scores of Sunac at the developer’s request after the company was bombarded by a series of rating downgrades. This was followed by a rating downgrade from Moody’s Investors Service last month due to weak recovery prospects for the company.