China's No. 3 developer makes deals as default risks escalate

[BEIJING] China's third-largest developer is sustaining its pace of deal making even as bond investors start to price in a higher risk of default.

The yield spread on Greenland Holdings Corp's US$600 million 5.875 per cent 2024 notes over US Treasuries has widened 47 basis points this year to 404. There is a 6.89 per cent probability it will miss debt payments in the next 12 months, according to the Bloomberg Default Risk model that tracks metrics including share performance, debt and cash flow. While the risk of default has declined from a late-January peak of 8 per cent, it's the highest among the nation's biggest developers.

Greenland announced 2 billion yuan (S$272.7 million) in Chinese acquisitions since December - after buying properties in Los Angeles and Toronto in a global push since 2012 - and on Friday said it will list hotel-focused real estate investment trusts in Singapore. China International Capital Corp said the expansion had burdened Greenland with debt and that the company's reputation could be damaged after a Caixin magazine report on March 1 that 20.5 per cent-owned affiliate Shanghai Yunfeng Group Co. was in default.

"The high leverage is due to its rapid business expansion and slow pace of contracted sales collection," said Franco Leung, an analyst at Moody's Investors Service in Hong Kong, which has a negative outlook on the company. "We don't apply rating uplift from government support because Greenland is primarily a property developer and it's unlikely that a developer would receive extraordinary funding support from the government at times of stress."

Greenland, 48 per cent owned by the Shanghai government, has good liquidity and has never had any defaults, said Wang Yuxing, a spokesperson for the company.

"As a big global company, we respect and protect our creditors and we will try to improve operational efficiency," said Ms Wang. The developer isn't responsible for Yunfeng's bond payment issues "because Greenland didn't guarantee the notes," she said.

Caixin magazine reported on March 1 that Yunfeng was in default on 2 billion yuan of privately placed notes in January after early repayment clauses were triggered. An official at Yunfeng's general office who declined to be identified refused to comment. Shanghai's State-owned Assets Supervision and Administration didn't respond to a fax seeking comment.

Greenland's yield spread on its 2024 notes over US Treasury went as high as 460 basis points on Jan 26. That compares to an average of 193 basis points for for the Bank of Merrill Lynch China investment-grade dollar bond index. The developer's shares declined 16.8 per cent this year. New-home prices gained in 47 cities in February, led by gains in major hubs, compared with 38 in January, the National Bureau of Statistics said Friday.

"The company's property projects are concentrated in second-tier cities," CICC analysts Xu Yan and Ji Jiangfan wrote in a March 1 report. "There is uncertainty in selling property inventory, which could harm its liquidity." Greenland had total debt of 249 billion yuan at the end of September, according to Bloomberg-compiled data, which dwarfs its cash and cash equivalents of 38 billion yuan at the end of September. Its total debt was 359 per cent of its equity as at end of September. This compares to the median ratio of 87 per cent for Chinese developers with market cap of at least 10 billion yuan.

Moody's rates Greenland's dollar notes Baa3, or one level above junk, while Standard & Poor's scores the bonds BBB-. The Bloomberg Default Risk model's reading - which is based on quantitative analysis of borrowers and not designed to be an official evaluation - is equivalent to a non-investment grade. It is the worst among the 15 Chinese builders with market cap of at least US$5 billion and compares with an average probability of 1.5 per cent.

Last week, the company announced plans to sell 19 hotels to a Singapore fund management company for 21 billion yuan and jointly manage the properties in Reits that will scout for new properties. Greenland said in a March 12 filing to the Shanghai stock exchange that the hotel sales fit into its "asset-light" strategy and will help with its liquidity and speed up capital turnover. Fitch Ratings said the plan may help to reduce the group's leverage.

"This allows for an asset-recycling process for Greenland to dispose of these high-capex property investments and improve its cash flow management," the credit assessor said in a March 17 statement.

"Despite the high debt leverage, Greenland's liquidity should still be fine because of its strong state-owned enterprise background," said Ross Lee, credit analyst at Bank of China Hong Kong Ltd.

Premier Li Keqiang told a press briefing Wednesday that the government will seek to avoid mass unemployment as it reduces excess capacity in the economy. Baoding Tianwei Group Co last year became the first state-owned company to renege on onshore bonds and didn't meet 1.06 billion yuan in payments due last month.

"Greenland's rating has been under threat as part of the wider Moody's and S&P mass-reappraisal of the leveraged low-BBB state-owned enterprises," said Owen Gallimore, a credit analyst in Singapore at Australia & New Zealand Banking Group Ltd. "And such leveraged strategies at Greenland are beginning to look out of place with the new government policies of deleveraging SOEs and making non-strategic companies stand on their own feet."

BLOOMBERG