Just seven weeks ago, Zhenro Properties Group Ltd. looked like a rare beacon of power in a Chinese real estate industry, which is facing an unprecedented level of bankruptcy, according to Bloomberg.
The company had just announced plans to buy an indefinite-term bond and boasted that one of its units had secured a credit limit of 9.14 billion yuan ($ 1.44 billion) from the state-owned Bank of China Ltd. Zhenro’s short-term bonds traded at almost 80 cents a dollar, compared with 17 cents for the real estate giant China Evergrande Group.
Zhenro has now become the latest company in the industry to warn that it may not meet its obligations.
The sudden and mysterious slide of the company into the current dangerous situation increases investor anxiety towards many of its counterparts, undermining the Chinese government’s efforts to limit financial transmission to a real estate sector that accounts for about a quarter of economic output.
Speculation of a liquidity crisis at Zhenro helped spark a sharp drop in Chinese bond developers last week, raising financing costs for companies that have to pay off nearly $ 100 billion in debt this year.
Zhenro confirmed investors’ fears late Friday, saying it may not have enough cash to cover its debt payments next month. The company is urging bondholders to drop any breach claims that could result from a failed $ 5 million banknote purchase on March 5.
The development is the latest sign that China’s real estate crisis is far from over.
The yield on a heavy index for Chinese junk bond developers rose more than 20% last week, making refinancing prohibitively expensive for much of the industry. Home sales continued to fall, reducing developers’ main source of cash. Zhenro said on Friday that its sales fell by almost 30% in January compared to the previous year.
While the company is very small compared to Evergrande – as it ranks 30th among Chinese developers with conventional sales last year – Zhenro’s problems have had a huge impact on the wider market, as it has shown so recently that its finances were sound.
Although Zhenro bonds collapsed due to speculation that it would fail to redeem the permanent bill, the company dismissed reports of its offshore debt securities as “untrue and fictitious”.
While Zhenro blamed “unfavorable market conditions” for its debt problems in Friday’s statement, it provided few details as to why its financial position had deteriorated so dramatically since early January.
The episode may reinforce the “sell first, ask questions later” mentality that has prevailed among investors in Chinese real estate debt. Zhenro’s long-term bond sank to about 23 cents against the dollar from 93 cents in just a few days as rumors of a failed redemption spread, while the dollar bill ending in April fell to about 25 cents from 77 cents. It took about four months for a similarly large drop in Evergrande-denominated dollars last year.
Rising concerns about the lack of transparency in China’s real estate industry may push some investors to avoid it altogether, Bloomberg Intelligence analysts including Andrew Chan wrote in a report last week. “Bondholders with a low appetite for risk may not be able to cope with extreme price volatility,” the analysts wrote.
Source: Capital
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