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Greenland a Harbinger of Bailouts in China’s Property Sector

The use of government-backed credit support rather than the purchase of fire-sale assets is becoming the preferred policy option for reducing risk in Chinese real estate sector


China Evergrande
Bond defaults by China Evergrande Group, the world's most indebted developer with some $300 billion in liabilities, as well as other developers, have seen authorities soften their initial stance that market forces would hold sway. File photo: AFP.

 

Greenland Holdings, a major Shanghai-based Chinese state-backed property developer responsible for marquee projects at home and abroad, was scrambling for funds late last year, people with direct knowledge of the matter said.

In danger of defaulting on a $500 million offshore bond in December, it was rescued after Shanghai authorities told local state-owned enterprises (SOEs) to step in and buy new Greenland debt, sources told Reuters.

Greenland‘s financial straits and subsequent bailout, details of which are previously unreported, mark the first known example where Chinese SOEs have been directly ordered to participate in a property sector bond offering – highlighting more active and targeted action being taken by authorities as they seek to limit risks posed by the industry.

Here is what happened.

Greenland, China’s seventh-largest property developer and highly leveraged, became swept up in a sector-wide debt crisis that roiled international markets last year amid fears that a large-scale developer collapse could derail the economy.

Like many of its peers, it was reeling from tighter caps on debt ratios introduced in January 2021 that resulted in a liquidity squeeze across the sector.

By October, some long-term lenders such as CITIC Bank were reducing their lending, two people with direct knowledge of Greenland‘s financial situation said, adding the state of affairs was not helped by downgrades to its debt ratings from credit rating agencies.

It had sought fresh financing from trust firms and leasing companies but a sharp rise in interest rates was proving to be a stumbling block, they said.

In the fourth quarter, Greenland embarked on more drastic steps – slashing real estate-related headcount by 30% and placing more strategic emphasis on infrastructure construction projects that accounted for half of its revenues, they added.

Even so, it did not have sufficient funds to cover the likely event that many holders of the $500 million puttable bond would seek to exercise their right to redeem it roughly a year early on December 16, they said.

Sources for this article were not authorised to speak to media and spoke on condition of anonymity.

Greenland said in a statement to Reuters it has always repaid its domestic and overseas debts in full and kept financing costs low, adding that its liabilities reduction plan was progressing smoothly. CITIC Bank did not respond to requests for comment.

 

White Knights

Concerned about Greenland‘s financial situation, Shanghai municipal authorities had sometime during the fourth quarter asked its lenders to be flexible with repayment extensions and to maintain rather than drop existing relationships, said one person with knowledge of the matter.

Then in early December, the Shanghai government’s state asset administrator held a meeting with representatives of seven SOEs, ordering them to buy new dollar bonds issued by Greenland, according to four people briefed about the gathering.

Shanghai Municipal Investment Group, Bank of Shanghai, Shanghai Land (Group) Co and Lujiazui International Trust Co were among the SOEs, two of the four sources said.

On December 14, Greenland announced it had raised $350 million in a dollar bond issue. Due August 2022 and carrying a 7.974% coupon, it was a rare developer bond deal at a time when concerns about the sector had dried up new note issuance. The only purchasers were the seven SOEs, two sources said.

Three days later, Greenland said it had redeemed 85.9% of the $500 million bond after put options were exercised.

The Shanghai government’s state asset administrator, the Shanghai municipal government and the four SOEs named above did not respond to requests for comment.

China’s property sector crisis has posed a high-stakes quandary for President Xi Jinping, who is seeking to secure an unprecedented third term this year.

On one hand, the government wants to impose financial discipline on an industry known for unbridled borrowing and which by some metrics accounts for a quarter of China’s economy. But it also can’t afford to derail growth or fuel social unrest.

Bond defaults by China Evergrande Group, the world’s most indebted developer with some $300 billion in liabilities, as well as by other developers, have seen authorities soften their initial stance that market forces would hold sway.

Rules relating to M&A and capital raising in the sector have been relaxed and developers have been given easier access to pre-sale funds held in escrow accounts. At last week’s annual meeting of parliament, Premier Li Keqiang signalled more easing was in the works.

Local authorities have also encouraged SOEs to purchase developer assets, sources have previously said, although it is unclear if any SOEs have been ordered per se into an acquisition.

 

Shimao Too

Shimao Group Holdings, a developer which has put all its property up for sale to repay debt, has also had a helping hand from Shanghai municipal authorities.

Some 27 of Shimao’s creditors were asked to maintain lending positions and to not publicly undermine Shimao’s creditworthiness, said a separate person who attended a creditor meeting. “Everyone was stony-faced, no one had any reaction,” the person said.

Shimao did not respond to requests for comment.

Greenland, however, appears to have had more government intervention than most other developers. The sources who spoke with Reuters were not sure why but noted Greenland is state-backed and has high-profile projects.

It recently built Sydney’s tallest residential tower and has billions of dollars worth of projects in London, New York, Los Angeles and Paris. At home, its projects include construction of the tallest building in northwest China and it is heavily involved in building subways, highways and bridges.

The use of government-backed credit support rather than the purchase of fire-sale assets is becoming the preferred policy option for reducing risk in the sector, one government policy advisor told Reuters.

There is also a growing consensus that when deciding which firms will gain government support, it will be size rather than whether a firm is government-backed or private that will be the key factor, the person said, adding the bottom line is to prevent a financial crisis.

Just how far the government will support Greenland remains to be seen. Its financial difficulties are not over. It has $190 billion in total liabilities, and according to Refinitiv data, outstanding bonds worth $7.1 billion, of which $3.7 billion is due to mature this year.

The order to SOEs to support Greenland only pertained to the $350 million purchase of new debt, the sources said.

At one SOE at least, there is fear that Greenland might fall further into financial strife and of the potential fallout if that happens.

The written instructions with a Shanghai SASAC letterhead that ordered the purchase of Greenland‘s bonds are being kept in a safe place in case Greenland defaults and SOE officials are called to account for their actions, one person with knowledge of the matter said.

 

  • Reuters with additional editing by Sean OMeara

 

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Sean O'Meara

Sean O'Meara is an Editor at Asia Financial. He has been a newspaper man for more than 30 years, working at local, regional and national titles in the UK as a writer, sub-editor, page designer and print editor. A football, cricket and rugby fan, he has a particular interest in sports finance.

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