China property debt crisis: R&F warns its asset sales may not meet bond repurchase deadline in a slumping real estate market

·4-min read

Guangzhou R&F Properties said it may not be able to sell assets in time to buy back some of its offshore bonds, as one of China’s largest and most indebted developers struggles to meet its debt obligations amid a sinking real estate market.

The actual amount of funds that can be received from selling certain assets may be less than the previous estimate of US$300 million, R&F said.

“Due to the continued volatility in the property sector in China, proceeds from certain asset sales contemplated by [R&F] may fail to materialise” by the January 10 deadline to buy back some of its US$725 million dollar bonds, the Guangzhou-based developer said in a filing to the Hong Kong stock exchange, adding that it’s postponing the settlement date to January 12. Still, the company is “continuing to take active measures to shore up its liquidity position up to the settlement date,” R&F said.

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China’s sales of new homes topped 1,699 units during the New Year holiday, a contraction of 57 per cent from the same period in 2021, marking the lowest transactions volume in five years, according to Zhuge Zhaofang, an online property agency. The sales slump added to the cash crunch in an industry that is struggling under funding restrictions and a heavy debt load.

Source: Northeast Securities, Tianfeng Securities, company reports SCMP
Source: Northeast Securities, Tianfeng Securities, company reports SCMP

R&F was a financial white knight as recently as 2017, when it sprang a surprise as the 11th-hour buyer to to take over 77 hotels from Dalian Wanda Group during China’s crackdown on debt-fuelled corporate takeovers. The deal, valued at 19.9 billion yuan (US$3 billion), was the biggest real estate transaction at the time.

R&F would top up its acquisitions six months later, paying £35.6 million (US$49.1 million) to buy 60 per cent of Wanda International Real Estate Investment, which was set up to invest in the Nine Elms project in southwest London.

Guangzhou R&F Properties’ chairman Li Sze-lim (centre) with Dalian Wanda Group’s founder and chairman Wang Jianlin (right) during the signing ceremony of Wanda’s asset sales in Beijing on July 19, 2017. Photo: AFP
Guangzhou R&F Properties’ chairman Li Sze-lim (centre) with Dalian Wanda Group’s founder and chairman Wang Jianlin (right) during the signing ceremony of Wanda’s asset sales in Beijing on July 19, 2017. Photo: AFP

The fortunes turned in 2021, as China’s developers came under pressure by the central bank and financial regulators to pare their borrowings. R&F sold three assets in September that formed the core of an abandoned Hong Kong initial public offering for 10 billion yuan cash to Country Garden Services Holdings.

R&F’s warning on its latest asset sale underscores the challenges for China’s most indebted developers, as sellers overwhelm buyers in the rush for financial liquidity and the desperation to avert defaults on their debt.

The Hong Kong-listed company proposed last December to buy back two bonds due 2022, with an option to pay US$1,000 with accrued interest payments from some bondholders, capping 50 per cent of the US$725 million bonds.

SCMP Graphics
SCMP Graphics

Creditors holding close to US$520 million, or 72 per cent of the US$725 million in dollar bonds that R&F had offered to repurchase, had voted to accept an offer to exchange every US$1,000 owed in principal with US$830 in cash, the developer said.

The vote showed the eagerness of bondholders to receive their principal owed as soon as possible, despite a 17 per cent haircut, amid expectations that China’s record spate of bond defaults will only continue in 2022.

The cumulative default rate of China’s high-yield dollar bonds is expected to rise to 42 to 45 per cent in the coming three to six months in 2022, from 38 per cent in 2021, according to Credit Suisse. As investment banks and funds showed their concerns on the liquidity conditions of private developers, investors of such companies are closely watching the situation of asset sales of the developers.

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