Vanke’s RMB 2.4B Buy of Tahoe Stake Blocked as Shares Frozen

China Vanke, the mainland’s biggest property firm by market value, last week appeared set to buy 19.9 percent of embattled villa developer Tahoe Group for RMB 2.4 billion ($343 million), however, that plan now appears in doubt.

The stake sale, which many saw as a potential prelude to Vanke taking over the cash-strapped luxury builder, hit a snag today when the Shenzhen-listed firm declared today that the shares held by its chairman, Huang Qisen, had been frozen by court order.

The judicial action came two days after Tahoe had announced that, due to cross-default provisions triggered by a bond default one month ago, it had failed to make payment on Tuesday on a RMB 2 billion bond which had originally been set to mature early next month, with the firm’s total obligations on the notes totalling RMB 2.15 billion including interest. That fresh default adds to past-due debts of RMB 27.1 billion that Tahoe had accumulated by early last month.

Rescue Deal Runs Aground

Last week the Fujian-based builder announced plans to sell the stake belonging to Tahoe Investment Group, a private firm controlled by Tahoe chairman Huang Qisen, in a deal which would make Vanke the second largest stakeholder after the Huang-controlled vehicle.

Tahoe signed the share sale agreement with Vanke after failing to make payment on multiple bond obligations since early 2019, including defaulting on a RMB 1.5 billion bond that reached maturity on July 6th.

“[The transaction] will help optimize the company’s shareholding structure, help the company continue to improve corporate governance, and also help promote the restructuring of the company’s current debt,” Tahoe said in a statement.

The announcement today makes clear that the shares held by Tahoe Investment Group are among the 1,56 billion shares held by controlling shareholders and their affiliates frozen by the court, with those shares representing 62.7 percent of the listed vehicle’s stock.

With Vanke agreeing to buy the stake at RMB 4.90 per share, investors had regained confidence in the smaller developer. Tahoe shares had surged 7.5 percent to RMB 6.40 per share after the deal was with Vanke was publicised late last week, only to dip again to RMB 5.37 by closing time today.

Shenzhen-listed Tahoe has been courting a variety of potential white knights since January, including China Resources, Jinmao, Xiamen C&D and Xiamen International Trade but had failed to sign an agreement with a rescuer – until last week.

The cash transaction had been conditional on Tahoe shouldering full responsibility for its operations and debt. Those obligations include restructuring its debt in a way that will allow the firm to resume normal operation. A plan for the restructuring was specified in the share transfer agreement between the two companies, and Vanke must sign-off on the restructuring plan before its implementation.

Cash-Strapped Tahoe Raises Funds

Tahoe, which ranks as the largest Chinese developer to have defaulted on a bond repayment to date, saw US ratings agency Fitch to downgrade the company’s credit score to ‘restricted default’ after the bond failure last month, which jibes with Tahoe’s Caa1 rating by Moody’s – indicating substantial risks – and a negative outlook.

The debt-ridden company reported a net loss of RMB 402 million in 2019, and by the end of March 2020 had racked up short-term debt of RMB 67.9 billion, according to data gathered by financial research group FactSet.

“[The transaction with Vanke] will help revitalize Tahoe’s existing assets and maintain normal operations,” Tahoe said in an announcement. It may also help the developer fend off unhappy lenders.

Since the second half of 2019, the property developer has been sued by multiple creditors for failing to repay its debts on time. The list of plaintiffs include Tibet Trust, which brought court action for Tahoe’s failure to repay a RMB 120 million debt. The case was settled in April this year.

As a result Huang was added to the debtors’ blacklist by the Chinese Supreme Court in late April, exposing him to punishments including a ban on flying first class or using high-speed trains.

Buyers of the company’s housing projects have staged protests in recent months amid construction delays, fearing that the developer will run out of cash. Tahoe’s sales in the first half of 2020 plunged 44 percent to RMB 25.4 billion, according to industry data provider China Real Estate Information Corporation.

Fresh Obstacles on the Way

In the coming months Tahoe faces additional financial challenges, with three domestic bonds with a total value of RMB 4.4 billion set to reach maturity in early October 2020, while a total of $841 million in US dollar-denominated debt is set to come due over the next 12 months, Tahoe’s financial report states.

Meanwhile, the property developer has cash reserves and equivalents that amounted to just RMB 5.6 billion in late March. This represents a nearly 60 percent decline from the end of 2019, according to the group’s first-quarter earnings report. Tahoe has yet to release its second-quarter earnings.