Shimao Group, believed to be one of the healthiest developers in China amidst the country’s ongoing real estate crisis, has shocked investors by reportedly defaulting on its obligations. Shimao has about $10.1 billion in outstanding local and offshore bonds. It is the 13th largest developer in China in terms of contracted sales.
According to a Jan. 6 report by Reuters, the company missed a payment of 645 million yuan ($101 million) due to a lender. A letter by the lender China Credit Trust Co. seen by the media outlet claims that Shimao had paid off 755 million yuan ($118.01 million) of the total trust loan. By not paying the remaining 654 million yuan, Shimao has thus defaulted.
“The reason that the market is a bit more worried about this case compared to the other developers that [fell] into trouble [is] because Shimao is considered … a relatively healthy name,” Gary Ng, Asia-Pacific economist at Natixis, told CNBC. He pointed out that Shimao had met Beijing’s three red lines rules that placed a restriction on a developer’s debt in relation to their capital, asset, and cash flow levels.
After analyzing data on trust loans, Ng believes that property developers are finding it more difficult to raise funds. Ng admitted that he wouldn’t be surprised if China witnesses more defaults in bonds, loans, and different types of products in the future. Ng also believes that the quickest way to ease investor worries in the real estate sector would be for a state-backed fund to inject fresh capital.
“A major price collapse or a downfall of Shimao will cause lapse in confidence in cross-over investment grade names in China property, which acts as the final refuge for the sector,” Anthony Leung, head of fixed income at Metropoly Capital HK, told Bloomberg.
Leung warned that the impact could be even more devastating than the debt crisis of Kaisa or Evergrande as their credit quality was much lower than that of Shimao. In November, S&P had predicted that Shimao would struggle to deleverage over the upcoming 12-month period.
Following the Reuters report on Shimao defaulting on its payment to China Credit Trust Co., the company’s shares plunged by over 17 percent on Jan. 7. But on Jan. 10, Shimao’s shares surged by over 20 percent following a report by Caixin that the company is looking to sell all its commercial as well as residential real estate projects.
The developer has reportedly struck a deal with a state-backed firm to sell its Shimao International Plaza Shanghai property for over 10 billion yuan.
In a research report, Daiwa Securities Group said that Shimao will be locked in a vicious cycle of liquidity due to negative news regarding the company.
“We believe negative publicity will erode the confidence of home buyers and investors… This, in turn, would negatively impact Shimao’s future refinancing activities and contract sales prospects and lead to further deteriorating cash flows and liquidity,” Daiwa said.
The investment bank predicts Shimao to be liable for around 23 to 25 billion yuan ($3.92 billion) in corporate bonds, trust loans, and asset-backed securities (ABS) this year. Shimao only has a cash reserve of 16.1 billion yuan.
In a recent note, S&P Global warned that the possibility of a default in China’s real estate sector will escalate in the first quarter, especially if Beijing’s restrictive policies on the sector do not ease.
“A considerable number of Chinese developers are still facing downward pressure and grappling with tight liquidity,” Ricky Tsang, an analyst at S&P Global Ratings, said.