Major China Developer Sunac Defaults as Debt Crisis Spreads

·4-min read

(Bloomberg) -- Sunac China Holdings Ltd. has defaulted on a dollar bond, becoming one of the biggest Chinese property companies to renege on its obligations amid a record-breaking wave of missed payments.

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China’s fourth-largest developer said in a filing to the Hong Kong stock exchange that it didn’t pay a $29.5 million coupon on the note before the end of a grace period Wednesday, and that it doesn’t expect to make payments on other securities.

Home sales have been significantly affected by the recent Covid-19 outbreak in China, and that’s worsened the company’s liquidity constraints, it said. Sunac appointed legal and financial advisers to help assess the firm’s capital structure and liquidity, according to the filing.

China’s property sector has been grappling with a debt crisis since last year, following a nationwide crackdown on excessive leverage and a string of defaults. More than a dozen builders have missed offshore note payments, including giant China Evergrande Group. High-yield dollar bonds from Chinese issuers -- the bulk of which come from property firms -- are extending losses after dropping for a record eight straight months through April.

“The extent of this has spread up the chain and has been a big surprise for the market,” said Sheldon Chan, portfolio manager for Asia credit bond strategy at T. Rowe Price. “Going into the cycle you may have been expecting 20%-30% of developers defaulting, but now we are talking about more than 60% or 70% of the market being priced under 60 cents on the dollar, where the implied default rate is very high.”

Sunac is the biggest developer to default on a public bond payment this year. The development is fueling concerns about a new wave of debt failures among real estate companies that until just several months ago were considered safer borrowers. Some of Sunac’s dollar bonds were indicated above 80 cents on the dollar as recently as February. They’re now below 30 cents.

“We are concerned that the event may be a prelude to a fresh wave of defaults among weak private developers that are teetering on the brink,” said Leonard Law, senior credit analyst at Lucror Analytics. “These developers’ cash crunch has been exacerbated by poor contracted sales amid China’s lockdowns.”

Sunac missed an initial deadline last month for the coupon payment on its 7.95% dollar bond maturing 2023, and had a 30-day grace period that expired Wednesday. The default could trigger cross-default on other offshore debt, the note’s prospectus shows.

The payment in question was the first of four dollar-bond coupons initially due in April but which holders have told Bloomberg News weren’t paid.

Nearly all of this year’s public-bond defaults among Chinese issuers have been by developers. Many others in the sector have exchanged or extended debt in order to preserve cash amid the home-sales weakness and firms’ inability to refinance offshore debt.

Sunac has been in the spotlight for months. It has $7.7 billion of dollar bonds outstanding -- among the highest for Chinese developers, according to Bloomberg-compiled data. Its shares and dollar bonds have plunged some 80% since September, when a subsidiary’s letter to a local government requesting “special policy support” became public.

In Thursday’s filing, Sunac said that given its liquidity constraints, there’s no assurance it “will be able to meet its financial obligations when due or within the relevant grace periods.” Not paying when required or reaching a timely resolution with creditors “may result in the acceleration of relevant financial obligations or taking of enforcement actions,” it said.

The following table shows dollar-bond coupons and interest coming due:

Sunac raised HK$7.4 billion ($945 million) in November from selling stock and a stake in its property-management unit. At the same time, controlling shareholder and Chairman Sun Hongbin provided a $450 million interest-free personal loan to Sunac, among numerous property tycoons going into their own pockets to aid their firms.

The developer, which still hasn’t released 2021 results, reached a debt-payment crossroads this quarter after repeated downgrades from credit raters. It was able to push out over 18 months a 4 billion yuan ($592 million) payment due April 1. The first 10% of that bond’s principal repayments is due May 15, before three other dollar-bond coupons’ grace periods end. Meanwhile, a 1.44 billion yuan note is set to mature June 13.

(Adds comments from analyst)

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