About a year ago, Chinese billionaire Sun Hongbin was certain that his luxury real estate company Sunac China would never “bomb”.
Last week, his company – China’s third-largest developer – defaulted, missing the coupon payment deadline on a $742 million ($1.1 billion) offshore bond.
Unlike Evergrande, which defaulted in December last yearSunac appeared to be in good financial shape and the boss, Mr. Sun, had previously been diligent in repaying his debts.
He even paid off some of the company’s debt out of his own pocket, Chinese media reported.
Betty Wang, senior China economist at ANZ Research, said Sunac’s default was “another blow to the fragile property sector”.
“The shock to market confidence, particularly in the private sector segment, has been quite significant,” she told the ABC.
“There are a lot of downside risks in the economy.”
A “white knight” in trouble
While the Hong Kong-listed company apologized for the default, it said it could miss more deadlines in the coming year.
The company also asked creditors to give it “time to work through challenges” while it works “to expedite sales and payment collection, dispose of assets, seek debt extension and to introduce strategic investors”.
Mr. Sun is widely known as a “white knight” in China’s property market, who has actively acquired assets from competitors over the past five years as the property market cooled.
He made it to the list of China’s 200 richest people at the age of 40. In 2016, at the age of 53, his company became one of the top 10 developers in China through rapid business expansion.
Today, Sunac is one of China’s most indebted developers, with $7.7 billion ($11 billion) in US dollar obligations.
After Beijing implemented the “three red lines– in an effort to reduce debt within the industry, curb runaway house prices and raise building standards – a wave of defaults has hit the sector.
China’s biggest developer, Evergrande, is reeling from more than $400 billion in debt.
Other companies – such as Fantasia and Kaisa – have also defaulted after struggling to access funding or refinancing.
Since November of last year, several policy tweaks at state and local levels have been introduced in an effort to rescue the collapsing housing sector, while avoiding full bailouts.
Last week, China’s central bank, the PBoC, announced it would lower the mortgage rate for first-time home buyers for the first time in eight years, by 20 basis points.
However, Ms. Wang said, Sunac’s default shows that bailout policies have failed to prevent China’s real estate sector from continuing to decline.
“The uncertainty surrounding the closures and their impact on the local economy has clouded household income prospects and limited their purchasing power.”
More deadlines in sight
However, the worst may be yet to come as Chinese developers face a new spike in offshore bond redemptions in June and July.
ANZ Research estimates that $14.3 billion ($20.3 billion) of offshore bond debt, or 25% of this year’s annual amount, will fall due over the next two months.
Sluggish home sales – which have been hit by strict COVID-19 lockdowns in parts of the country – have made the situation worse.
The top 30 listed developers in China reported an 11.1% year-over-year contraction in their collective cash position at the end of 2021, and since January sales have fallen 32.2% d year on year, according to ANZ Research.
Contract home sales from China’s top 100 developers halved in April, meaning monthly operating income estimated at $5.7 billion ($8.1 billion) won’t be enough to cover payments debt.
China’s real estate sector contributes more than 20% of China’s economic output by some measures, and Wang said a slowdown across the sector would increase uncertainty about China’s growth prospects.
“A fiscal push and the infrastructure push have accelerated and could help close the gap if the real estate sector pulls back,” she said.
“We expect China’s potential growth to fall to the low end of the 4-5% range over the next few years, much sooner than many others expect.”
The NAB also downgraded China’s GDP growth outlook, expecting China’s economy to grow 4.2% in 2022, down from 5% previously forecast.
As Beijing has signaled it will not bail out private developers, many companies are betting on the sector rebounding sooner rather than later.
“The fall of another top developer is likely to accelerate the industry’s reassessment process, jeopardizing the industry’s future,” Wang said.
“We remain cautious about the short-term outlook for private developers.”
Post , update
#Chinas #thirdlargest #developer #defaulted #worst