Struggling Chinese developers now face a new challenge: trust issues. Things have been bad for the sector since the Evergrande crisis last year. But a company seen as one of the few remaining pillars of strength has suddenly warned of a default. That damages what is left of investor confidence in the sector.
Zhenro Properties is the latest developer to admit it may not have enough cash to meet debt payments. The midsize mainland Chinese developer, previously valued at more than $3bn, has asked bondholders to waive any default claims on its $200mn perpetual note next week.
Zhenro shares fell 14 per cent on Monday, bringing them down 80 per cent for the month. Trading in a 2024 bond has been suspended following extreme volatility. Its dollar note fell to 25 cents on the dollar, down from 80 cents just a few weeks ago.
The surprise plunge is not something bondholders could have prepared for. Zhenro had recently secured a Rmb9.1bn ($1.4bn) credit line from state-owned Bank of China. Unlike peers, there have been no signs of redemption risk.
Rating agencies Fitch and Moody’s have downgraded Zhenro’s long-term issuer default risk and corporate family rating to junk, or B and B3 respectively.
The speed and scale of bond price falls points to a disconnect with such ratings. A “B” rating represents material default risk, but typically with a margin of safety. Such ratings have not historically signalled imminent defaults.
Information from companies themselves is hardly reliable. As shares plunged last week, Zhenro downplayed speculation about the default that is now imminent. Local peer Fantasia Holdings, which denied having any issues with liquidity, has defaulted on a bond payment.
Chinese property companies have about $100bn in debt maturing this year. The woes of companies such as Evergrande, Zhenro and Fantasia will make refinancings harder. More defaults from troubled companies should be expected.
Contagion from developers to the broader financial system remains unlikely. Instead, Chinese issuers will have to pay higher charges on capital raisings, regardless of their sector, to compensate investors for the unreliability of covenants.
