R&F pledges stakes with US$10 billion in assets under Guangzhou authority’s ward to avoid falling foul of ‘three red lines’ on debt

Sandy Li
·3-min read

Shares of Guangzhou R&F Properties tumbled by more than 3 per cent after a report that the developer had pledged its stakes in three companies with US$10 billion in combined assets to a unit under the Guangzhou city authorities to meet government limits on debt exposure.

The pledges to Guangzhou City Construction Investment Group comprise a 25 per cent stake in Sheungjin Real Estate Development, which owns the six-year-old office project Yingkai Square in Tianhe district; 50 per cent of Guangzhou Fujing Jishan Real Estate Development with a 20.6 billion yuan (US$3.18 billion) project at Jishan Village in Tianhe, and 100 per cent of Tianli Construction, according to a report on the property website Fang.com, which did not divulge the source of its information.

The exercise underscores the extent that China’s developers – among the world’s most leveraged, for using debt and loans to finance their massive projects – are being pushed to clean up their books under the government’s campaign to rein in debt, over concerns that defaults and bad debt in the industry could spill over into system risk for banks. Chinese financial regulators have drawn three so-called red lines under developers’ borrowings, capping their debt-to-asset ratio at 70 per cent, their net debt-to-equity ratio at 100 per cent and barred short-term borrowings from exceeding their cash reserves.

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“Local governments may have the incentive to provide indirect support to large developers that are important to the local economy, by coordinating with banks and, involving other private-sector participants” to give them some financial breathing space, said Fitch Ratings’ senior director of Asia-Pacific Corporates Adrian Cheng, in a written reply to South China Morning Post.

Artist impression of the developer Guangzhou R&F Properties' high-end residential project R&F Prosperous Residence in Phnom Penh, Cambodia.
Artist impression of the developer Guangzhou R&F Properties' high-end residential project R&F Prosperous Residence in Phnom Penh, Cambodia.

R&F Properties, chaired by Li Sze Lim, had already breached the Chinese central bank’s threshold for indebtedness, dubbed the “three red lines.”

Its debt-to-total equity ratio was 176.7 per cent as of June 30, according to its 2020 interim report. It has accumulated total debt of 224 billion yuan as at June 30, of which 89 billion yuan was due for repayment in less than one year.

“We estimate only 6.3 per cent of rated Chinese developers can comply with the three red lines measuring an issuer’s fitness to borrow, constraining debt growth,” said Esther Liu, director at S&P Global Ratings, adding that the measures to cool China’s residential property market should result in a 5 per cent drop in home prices in 2021, with sales likely flat on increased volumes.

R&F’s shares fell by as much as 3.8 per cent in Hong Kong to an intraday low of HK$9.59 on Monday. The company did not immediately respond to requests for comment by the Post.

“They will need to speed up property sales to support their funding needs, and in some cases may reduce selling prices to support sales growth,” said Franco Leung, associate managing director of Moody’s Corporate Finance Group, adding that highly geared developers will be restricted from using debt to fund their business growth in 2021. “Financially healthy developers, usually with better liquidity and low leverage, would have more flexibility to raise debt to fund growth, and could therefore acquire market share from weaker peers.”

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