China Fortune Land’s US$813 million of missed debt payments sparks fears of further defaults under Beijing’s ‘three red lines’ for property developers

Pearl Liu
·5-min read

Concerns about rising defaults in China’s property sector grew as a major developer became the first casualty of strict deleveraging rules recently introduced by the government, missing debt payments.

China Fortune Land Development, ranked 43rd by sales nationally last year, said it had overdue loans of 5.26 billion yuan (US$813.37 million) because of a liquidity shortage. Fitch Ratings downgraded the developer on Wednesday to reflect the “extremely high risk” of buying its debt.

The Beijing-based developer, which started out with a focus on industrial estates and urban property, said the default involves loans from banks and trust companies, but there was no delinquency on bonds, in an exchange filing late on Monday.

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The company said it had 55.9 billion yuan of debt that had matured since the last quarter of 2020, and that it currently only has 800 million yuan in cash and cash equivalent that can be used, leaving a huge shortfall. It promised that it will not dodge its repayment obligations.

It might not be easy for it to keep that promise. Within a month, a US$530 million offshore bond will be due, then 27 billion yuan in bonds will mature between March and June, followed by another 10 billion yuan in the second half of the year, according to Fitch Ratings. The credit ratings agency downgraded the developer to “CC” from “CCC” at noon on Wednesday, having downgraded it from “B” a week earlier.

China Fortune Land’s financial problems have added to mounting worries about a possible rise in defaults by highly leveraged Chinese property firms.

“This could be the first casualty [under the central government’s tightened credit rules] with more defaults to come this year,” said Warut Promboon, a credit analyst with research company Bondcritic in Hong Kong. “It is more of a symptom of what is to come. The market already understands that the smaller developers will be hard hit.”

China, presiding over the only major global economy that actually grew in 2020, is zealously keeping an iron grip on the country’s debt to avoid causing systemic risk to banks.

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Regulators are anxious to avoid runaway debt from setting off the kind of global financial crisis that followed the US subprime loans defaults in 2008, and introduced a trio of debt limits on home builders, dubbed the “three red lines”.

The red lines, which were outlined in Beijing last August during a financial symposium, represent different limits on borrowing: liability-to-asset ratio excluding advanced receipts at 70 per cent, net debt-to-equity ratio at 100 per cent, and cash to short-term debt ratio at one time.

Companies would be allowed to borrow more from banks and increase their debt by 5 per cent annually for each red line threshold that they meet, for a maximum yearly debt expansion of 15 per cent, starting from January 1 this year, according to the Economic Information Daily.

Seven of the 30 biggest developers listed on the stock exchanges of Shanghai, Shenzhen and Hong Kong, are currently tagged as “red” under the new guidelines, according to a January 11 report by Northeast Securities.

“There will be more policies to curb the property sector this year and these companies rated below B, or issuers of junk bonds, would find it a very difficult year, with a higher risk of missing payments,” said Winnie Guo, director of Chinese rating agency Pengyuan International.

Bonds sold by at least 85 Chinese companies totalling US$65.2 billion are facing repayment pressure, according to company and ratings firm statements compiled by Bloomberg.

But bond investors are still confident about larger home builders as “their ability to carry out presales early on in the property development allows them to generate cash flow in a short time frame,” said Adrian Cheng, senior director, Asia-Pacific companies, at Fitch.

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China Fortune Land said in the Monday announcement that it is actively raising money and seeking solutions, and has set-up a creditors’ committee.

The mayor of Langfang, a city neighbouring Beijing in northeast Hebei province where the developer first started out, said in the committee’s first meeting that the local government has talked directly with China’s top officials to help solve the problem. He called for financial institutions to give the developer some time, according to a meeting summary reported by the media outlet Guancha.cn.

The mayor said the Hebei provincial government has talked to People’s Bank of China governor Yi Gang, as well as Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, several times about the company’s debt. The local government will allocate funds from its budget immediately while working closely with Ping An, which holds a stake of around 25 per cent in China Fortune, to help the company to gradually repay its debts.

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