Sincere Property Group was not the only Chinese company that defaulted on a bond payment. China Fortune Land Development Co also defaulted on a USD bond which matured on Feb 28. On Feb 26, CFLD Cayman Investment, which issued some US$4.6 billion worth of offshore bonds in Singapore on behalf of CFLD, announced on SGXnet that it would not be redeeming its US$530 million tranche issued out of Singapore.
On Feb 19, CFLD Cayman had already announced it had short-term liquidity problems which needed to be urgently addressed. “To properly address its liquidity issues and improve its business operations, the company has appointed Admiralty Harbour Capital as its financial advisor and Sidley Austin as its legal advisor to assist it in exploring options available to it and navigating and resolving the issues it currently faces, to achieve the best outcome for the company and all of its stakeholders,” CFLD Cayman says.
CFLD is cash-strapped and needs to raise funds urgently. Although its net debt to equity was 193% as of June 30, 2020, the company has total assets of US$11.76 billion ($15.8 billion), investment properties valued at US$1.1 billion, and US$41 billion of inventory, according to filings on SGXnet. Also, CFLD’s cash to short-term borrowings is 1.18 times while liabilities to assets is 0.83 times.
CFLD is the largest developer and owner of business parks and industrial property in China. While Admiralty Harbour was appointed only in February, it was clear earlier that CFLD may need to divest some of its properties or inventory to raise cash to redeem its bonds, based on circulars and prospectuses filed on SGXnet.
As of June 30, 2020, CFLD had a total of 185 real estate development projects at various stages of development in 40 cities, including 27 completed projects, 139 projects under development and 19 projects held for future development, with a total GFA of 74.2 million sq m. Sincere and CFLD have some similarities. Both companies used significant indebtedness to finance their operations. Both companies also count units of Ping An as major shareholders. Ping An holds 25% in CFLD and 19.99% in Sincere. Ping An has a put option to put its stake in Sincere to Sincere’s shareholders.
But there are some differences too. CFLD has the potential to monetise its assets and is looking for a buyer for its business parks and its new industry city development business following its default.
Elsewhere, Guangzhou R&F Properties last November announced the sale of a 70% stake in a Guangzhou logistics park to Blackstone for US$1.1 billion.
Downgrades for CFLD by Moody’s, Fitch On March 2, Moody’s Investors Service downgraded CFLD’s corporate family rating (CFR) to Caa3 from Caa1. Meanwhile, Moody’s downgraded to Ca from Caa2 the senior unsecured bonds issued by CFLD Cayman and guaranteed by CFLD.
“The downgrade reflects our expectations that recovery prospects for CFLD’s creditors have weakened, given the company’s weak operations and liquidity, as well as its limited debt servicing abilities,” says Danny Chan, a Moody’s analyst and assistant vice-president. The missed payments highlight the severe challenges facing CFLD given its weak liquidity, he indicates. They will likely trigger cross defaults and accelerate the repayment of CFLD’s onshore bonds and its other offshore bonds, and significantly disrupt CFLD’s operations, jeopardising its asset values, he adds.
Fitch Ratings has a restricted default (RD) rating for CFLD, which represents an uncured payment default but no initiation of bankruptcy filings, administration, receivership, liquidation, or other formal winding-up procedures as yet and continuity of business operations.
The majority of claims are at the operating subsidiaries and have priority over claims at the holding company in a bankruptcy scenario. In addition, the holding company lackssignificant mitigating factors for structural subordination. As a result, the expected recovery rate for claims at the holding company will be lower, Moody’s indicates. CFLD was founded in 1998 with roots in Hebei, where the Xiongan Special Economic Zone is situated.
Although the initial focus was on building industrial parks for local authorities, CFLD diversified into home-building on sites adjacent to its industrial areas.
Moody’s points out that CFLD suffers from shareholder concentration. CFLD’s controlling shareholder Wang Wenxue held 37.2% as of end June 2020, with 32.13% of this stake pledged as of the same date.
Three red lines provide opportunity
If CFLD’s assets are up for sale, are there developers interested in swooping in? City Developments, which was once interested in business parks in China, is probably reluctant or unable to consider more assets in China, following the writedown of its $1.9 billion investment.
CapitaLand is an experienced China hand. So far though, CapitaLand declines to comment on assets from CFLD or any other company specifically. Rather, it is interested in New Economy assets.
Interestingly, CapitaLand had an excellent FY2020 ended December 2020 as far as cash inflow is concerned, in part because of cost cuts and deferment of capital expenditure.
On Nov 16, 2020, the developer announced it plans to redeploy part of the capital from asset recycling to New Economy assets, growing its China exposure in this sector to $5 billion over the next few years, from the current $1.5 billion. Investments will include business parks, logistics facilities and data centres, where tenants typically hail from New Economy sectors that enjoy robust fundamentals and a supportive regulatory environment. This target is in line with CapitaLand’s strategy to ride China’s economic transformation focusing on technology, services and domestic consumption, the developer says.
In an interview last November, Lucas Loh, president, China, CapitaLand Group, indicated that the developer is on the lookout for a portfolio of New Economy assets. He said that the “current situation” could provide opportunities for CapitaLand to acquire a significant portfolio of business parks, logistics facilities and data centres.
Loh was referring to the stresses some Chinese developers face with the potential implementation by the Chinese government of the three red lines to reduce leverage in the debt-laden sector. These are financial ratios comprising a 70% ceiling on liabilities to assets, excluding advance sales proceeds of projects; a 100% cap on net debt to equity; and a cash to short-term borrowing ratio of at least 1.
In the case of CFLD, it has clearly crossed two red lines — gearing and the liabilities to assets ceilings.
Loh also liked the idea of residential developments near business parks so that the populace could work, live and play within a certain area rather than travelling to the next town or city.
CapitaLand’s financials are strong and it is likely to choose assets and partners very carefully. CFLD may not be its cup of tea, although the latter’s assets could be interesting. CapitaLand’s gearing is 0.68 times, its cash to short term borrowings is 1.85 times, and a liabilities to assets ratio of 0.54 times.
A transaction in the region of $2 billion would not be an issue for CapitaLand, with its ability to recycle stabilised assets, setting up a fund to acquire the assets, or turning the capital via residential developments; and given its experience with the US$2.2 billion acquisition of Orient Overseas Development’s (OODL) assets in 2010.
Plans to recycle capital, increase AUMs
Despite a headline loss of $1.57 billion in patmi in FY2020, which was largely due to non-cash items, CapitaLand reported a free cash flow of $1.56 billion. Excluding impairment and revaluation losses, CapitaLand’s cash patmi in FY2020 was $924 million.
CapitaLand China Trust (CLCT) has been designated CapitaLand’s dedicated REIT platform for non-lodging assets in China. In November 2020, CLCT announced the planned acquisition of five business park properties from the Ascendas-Singbridge portfolio, and 49% of Rock Square it did not own, for $1.65 billion. The implied net property income yield of the five business park properties and Rock Square is 5.8%. Except for the 49% of Rock Square with a value of $345 million that was completed on Dec 30, 2020, the acquisition of the other properties completed early this year.
On the residential property front in China, CapitaLand has sold 5,400 units with a value of RMB10.5 billion ($2.17 billion) expected to be handed over from 2021 onwards. Loh says “If we do the same scale of development (of launching around 4,500 units a year) based on the existing landbank, it will last us to 2025 with no additions so we have four years supply and concentrated in a few big projects.”
Jonathan Yap, president, CapitaLand Financial, says “on the private fund side, it may do deals in the data centre and M&A is another area we will do”. Yap is referring to Korea Data Centre Fund 1, which CapitaLand announced on Feb 24. It is CapitaLand’s first private fund set up with 100% third-party capital in October 2020, to invest in an off-market data centre development project near Seoul in South Korea. Its AUM upon completion is expected to be around KRW290 billion ($350 million).
New economy Covid-friendly assets are in favour, but Yap says he will not rule out retail or lodging. “With our aspirations in asset management we need to go beyond Covid-friendly and there is nothing wrong with retail and lodging. It’s about investing at the right price.”
A CapitaLand spokesperson says the developer has, at some point in time, acquired assets through various ways, either by gaining control of the land (as in the case of Datansha in Guangzhou), or acquiring uncompleted properties such as Raffles City The Bund whose office towers are now open, or through the acquisition of completed properties. CapitaLand has held assets on its balance sheets, like 79 Robinson Road; or through private funds, REITs and joint ventures, like ION Orchard and Jewel. It has also acquired equity stakes in Chinese companies.
Whatever the case, if an opportunity comes along to acquire a portfolio of business parks, data centres and logistics assets in China, CapitaLand should be able to make a decision that benefits its shareholders.
