China’s property crisis continues to fester with CIFI Holdings, a Shanghai-based developer that has received government backing to secure new funding, revealing this week that it had defaulted on an onshore trust loan.
Credit information provider Reorg reported on Wednesday that CIFI, which is backed by Hong Kong private equity firm RRJ Capital and has often partnered with Henderson Land Development, has defaulted on some non-standard debts due. by a project company known as Tianjin Xingzhuo Real Estate Development.
“Market sentiment in the local housing market has affected the development and sales progress of this project, thereby affecting the cash distribution of said investment trust product,” CIFI announced to the exchange later Wednesday, after that Chairman Lin Zhong had sent a letter to employees informing them of the company’s lack of cash.
Over the past five trading sessions, the company’s shares have now lost more than 48% of their value and closed Thursday at HK$0.72 per share.
Run aground in Tianjin
Owning 31% of the Tianjin project company, CIFI said it was “in active discussion” with the financial institution issuing the fiduciary loan to “achieve a reasonable solution”.
The project company owns a residential development called CIFI Binhai Jianglai in Binhai New District in Tianjin, according to Wednesday’s report from Reorg.
In a new report shared with Mingtiandi on Thursday, Reorg described CIFI’s Tianjin Project Trust Loan as “quasi-equity, real debt,” and noted that the terms of the financing allow investors as shareholders to obligate l borrower to buy back the shares of the project from the lender if the performance conditions are not met, citing two sources familiar with the matter.
One of the project’s shareholders, a trust loan company, argued that the Tianjin project’s lack of progress had triggered a buy-back clause and demanded payment from the company, Reorg said, citing the sources.
Records from business information portal Tianyancha show that Daye Trust indirectly owns 27% of Tianjin Xingzhuo Real Estate Development Co, while Ping An Group owns around 42% of the project company.
In his letter to senior CIFI officials, President Lin Zhong warned of “difficulties and hardships” and called on them to “fight to the end”. The company’s founder said that “although we have over 30 billion RMB ($4.14 billion) of cash on the books, the overwhelming majority of it could not meet the reasonable demand for the society”.
Lin noted that mortgage boycotts have prompted many local authorities to tighten cash withdrawals from escrow accounts, further reducing liquidity for property developers.
As investors dumped shares of the company that day, CIFI tried to play down its liquidity crunch, noting in its Wednesday exchange filing that the RMB 30 billion in cash Lin mentioned was “an amount approximate unaudited”. The company said Lin’s statement was only to point out that it was unable to tap into the proceeds of the pre-sales due to government controls on its escrow accounts.
“For the avoidance of doubt, none of the statements in the internal letter imply or represent any inability of the group to pay its debts as they fall due or to meet the group’s commitments,” CIFI said. Investors responded by driving the company’s share price down another 16% on Thursday.
Government support is not enough
Analysts have linked the fate of CIFI, which avoided default on its publicly traded debt and made a timely payment on an offshore bond on Wednesday, to persistent challenges facing even the most powerful private developers in the world. the company as the market slows and credit remains tight.
“Year-over-year sales have been improving since June,” Shujin Chen, head of China FIG Research at Jefferies, told Mingtiandi when describing the current market situation, noting that the 2022 numbers were based on a low base compared to last year.
“However, private promoters are still struggling to repay their debts and debts given the still weak sales, tight pre-sale funds and limited financing channels,” Chen said.
Along with peers Longfor and Country Garden, CIFI is among half a dozen homebuilders who have recently received government support to raise new debt. Last week, the sponsor issued RMB 1.2 billion in 3.22% three-year medium-term notes due September 22, 2025, backed by a 100% guarantee from China Bond Insurance Co.
However, there have been signs of financial strain on the developer.
Fitch Ratings last week downgraded CIFI’s rating from “BB-” to “BB-” and maintained a negative outlook citing the developer’s lower cash pool and higher leverage.
“We estimate that CIFI’s unrestricted liquidity, excluding cash in escrow/short-term debt, fell to 1.0x in HY22, from 1.4x in 2021, while leverage exceeded our forecast. and the 50% negative rating threshold, rising to 57%, from 54 percent We believe that higher than expected cash outflows for joint venture (JV) projects and large construction commitments have weakened CIFI’s credit profile,” said Fitch analysts led by Rebecca Tang.
Earlier this month, CIFI agreed to sell its 60% stake in a Fortress Hill project with Wang On Properties to a joint venture of Wang On and Dutch fund manager APG for HK$1.34 billion (HK$170 million). dollars).
In unaudited operating statistics released this month, CIFI said its contract sales for the first eight months of 2022 were RMB 94.3 billion, down 47% from the previous year. last year.
CIFI’s interim report released on Thursday showed the developer’s net profit fell 79.7 percent year on year to RMB 730.8 million in the first half due to factors including RMB depreciation, a decrease in its share of the results of joint ventures and a decrease in the gain on investment properties. .