HONG KONG, May 18 (Reuters) – A shrinking land bank and sluggish real estate demand are likely to hamper the plans of a growing number of private Chinese developers who have defaulted on their debts and are restructuring them to gain breathing space to boost their fortunes to revive.
According to five developers and restructuring consultants, these hurdles could hinder the drastic improvements in sales and liquidity the brokers need to revive their business and long-term debt.
That could ultimately necessitate a second round of debt restructuring with some developers, they said.
“Most of the restructuring deals we’re seeing now just buy developers time. But problems can come back if the developers can’t generate the cash flow they expected,” said Esther Liu, an analyst at S&P Global Ratings.
Private developers have been in an uproar since mid-2021 after a debt crackdown by Beijing that trapped the China Evergrande Group (3333.HK), the No. 2 developer at the time, and eventually spread in the industry. Real estate companies were among the largest high yield issuers in Asia.
The crisis depleted developer liquidity, resulting in many defaults. Evergrande and Sunac China (1918.HK) are the most prominent of the handful of companies that have so far announced their offshore debt restructuring terms.
More are expected to follow in the coming months, including terms such as longer maturity extensions, lower coupons and turning some debt into equity, developers and advisers said.
The aim is that by freeing the developers from repayment obligations in the first few years, they will have enough breathing space to get back on their feet.
However, the revival appears uncertain as both the wider economy and the real estate sector stumble. Real estate investment and sales fell sharply in April, and the pace of house price growth slowed during the month.
In addition, the private developers are staring at lower potential future earnings as they are unable to build on their land banks due to their precarious financial position.
According to private researcher CREIS, by 2022, 84% of land in 22 major Chinese cities will be won by state-owned companies or state-backed developers at auction. In the first four months of this year, they accounted for 14 of the 20 largest land buyers.
“The industry is going to have to be restructured again,” said a senior executive of a mid-market developer that has been unable to service its offshore debt.
“In order to go back to normal operation, developers will have to buy land, but if there are proceeds from the sale, do you think our creditors want us to pay them back first or use it to buy land?” added the executive, refusing to name because of the sensitivity of the issue.
LEVER REMAINS HIGH
Developers said contributing to a possible increase in second restructurings is the likelihood that their leverage will remain high even after this round of restructuring due to strong opposition from creditors, particularly Chinese banks, to take “haircuts” to reduce the principal of the debt to decrease.
Creditors prefer to convert part of the debt into equity in such deals.
However, this means that the company’s debt will not be reduced to a meaningful level to run a healthy future business because a company cannot convert too much debt into equity to a level that changes control over the company.
Higher equity also increases the risk of developers ending up in negative equity.
“If the real estate price falls, it will negatively impact the book value of the developers’ equity and may need to be restructured again,” said John Lam, head of UBS Real Estate Research in China.
Some companies have recently entered into debt restructuring after extending repayment terms through bond swap deals last year, raising hopes that the range of supportive policies rolled out in November could help turn the market around.
The last case is KWG Group (1813.HK), which was considered to be of better quality.
Despite all the uncertainties and concerns, developers and creditors said they want to close the restructuring chapter quickly and move forward.
“Only by completing a restructuring can we talk to customers and banks and pretend everything is back to normal,” said one developer.
Reporting by Clare Jim and Xie Yu; Images by Kripa Jayaram; Edited by Sumeet Chatterjee and Muralikumar Anantharaman