On March 10, Bloomberg carried a news item which said no payment had been made towards a bond from Chongqing Sincere Yuanchuang Industrial with RMB444.5 million ($91.9 million) outstanding that matured on March 9, based on quotes from two bondholders.
“The firm’s failure to repay on schedule would constitute a default,” said Bloomberg, according to the bond prospectus seen. The bondholders said they have not received any proposal regarding a bond swap or payment extension.
In a statement on March 10, Sincere insinuated that the default was because of City Developments (CDL) withholding its approval for payments and finance-related matters. On March 11, CDL calls what Sincere said as “misleading” and “incorrect” and that CDL should not be held for the default.
CDL holds a 51.01% stake in Sincere Property Group that it purchased at $1.9 billion including the provision of liquidity support. CDL has already impaired $1.78 billion of the $1.9 billion outlay for Sincere.
Indeed, based on CDL’s share price reaction, all the negative news on Sincere appears to be priced in. During CDL’s results briefing on Feb 26, group CFO Yiong Yim Ming had warned that a bond default was due.
Analysts believe that the bond default on March 9, which in turn tends to trigger cross defaults, are within expectations as CDL’s chief transformation officer Goh Ann Nee had said that CDL’s balance sheet is ring-fenced from Sincere’s defaults. “CDL has ring-fenced its balance sheet and will not be pumping in new funds till Sincere stabilises,” she had said.
CDL’s downside is likely to be limited to $120 million, some analysts point out, which is the difference between $1.9 billion and $1.78 billion.
On Feb 22, just days before its FY2020 results announcement, CDL said it had entered into agreements to acquire a 55% stake in a Shenzhen technology park, Shenzhen Longgang Tusincere Tech Park, for $174 million from Sincere and China Ping An. Sincere continues to hold a 15.4% stake in the tech park.
When asked why CDL had paid a further $174 million for a property partly owned by Sincere, Yiong said that the $1.9 billion was for the equity in Sincere itself. “[We] indirectly owned the asset through our equity statement. In this case, we’re actually buying the asset,” said Yiong.
It is unclear whether CDL will be acquiring any more properties directly. Goh had said that Sincere has 300 entities and 67 projects. “CDL can review and see how we can later transform and reduce debt and liquidity. Sincere has to be unlocked, monetised and enhanced.”
Would that mean CDL is likely to invest directly in Sincere’s properties which could cause more financial outlay?
While analysts are comforted that CDL is not going to pump in any more money, some are concerned that there could be another transaction where CDL provides funds to Sincere. “Importantly, management ruled out equity injection until Sincere stabilises. Liquidity support at the asset level, akin to the recent acquisition of a China Tech Park from Sincere, we think could however be project-specific,” says UBS in a results update.
Based on CDL’s Feb 26 presentation, Sincere has some RMB32.9 billion in debt outstanding of which 78% is secured. This year, RMB20.6 billion of debt matures, of which RMB4.6 billion comprises bonds. After reading news stories out of China, one market watcher pointed out that most of Sincere’s debt appears to be secured by its properties. This means there may not be much left for CDL to unlock, monetise and enhance unless Sincere and CDL can renegotiate successfully with lenders.
Following the completion of a review by Deloitte & Touche Financial Advisory Services which was appointed by the CDL board last November as its external financial advisor, CDL formed a working group on Jan 4 led by Goh to improve the liquidity and profitability.
