China's latest default warning on Zhenro shocks industry

Shanghai

ONLY seven weeks ago, Zhenro Properties Group looked like a rare beacon of strength in a Chinese real estate industry reeling from an unprecedented stretch of defaults.

The company had just announced plans to redeem a perpetual bond and boasted that one of its units had secured a 9.14 billion yuan (S$1.94 billion) credit line from state-owned Bank of China.

Zhenro's short-dated bonds were trading near 80 cents on the dollar, compared with 17 cents for embattled property giant China Evergrande Group.

Now Zhenro has become the latest developer to warn it may not meet its obligations, an about-face that's extreme even by the standards of an industry where negative surprises have multiplied over the past year.

The company's sudden and mysterious slide into distress is raising investor anxiety towards many of its peers, undermining efforts by the Chinese government to stem financial contagion in a real estate sector that accounts for about a quarter of economic output. Speculation about a liquidity crunch at Zhenro helped spark a broad slump in Chinese developer bonds last week, driving up financing costs for companies that need to repay almost US$100 billion of debt this year.

Zhenro confirmed investors' fears late Friday (Feb 18), saying in an exchange filing that it may not have enough cash to meet its debt payments next month. The company is asking bondholders to waive any default claims that may arise from a failed redemption of its US$200 million perpetual note on March 5.

The development is the latest sign that China's property-sector cash crunch is far from over. The yield on a developer-heavy index of Chinese junk dollar bonds climbed back above 20 per cent last week, making refinancing prohibitively expensive for much of the industry.

Home sales have continued to plunge, crimping developers' main source of cash. BLOOMBERG