- On 18 July, Sino-Ocean Group announced that they intend to negotiate with the holders of the onshore bond, “18 Sino-Ocean 01”, on the repayment adjustment. The Group might not be able to have sufficient funds to repay the principal and interest of the bond on time. The "18 Sino-Ocean 01" will be matured on 2 August, with a principal amount of RMB 2 billion.
- According to Bloomberg, the Group already proposed to some major holders a one-year extension plan in installments: repaying the coupon on the original maturity date, 5% principals in September, October, and November this year, February and May 2024 respectively and the remaining 75% principal in August 2024.
- Also, the Group did not repay the coupon on an offshore bond, “SINOCE 2.700% 13Jan2025 Corp (USD)”, amounted to around USD 7 million. The coupon was originally due on 13 July, with a grace period of 14 days. The actual deadline is 27 July, so the Group still has time to pay the coupon to avoid material default.
- The Group sought help from its two major state-owned shareholders, China Life Insurance and Dajia Insurance, in order to resolve the debt issue. In early July, the two major shareholders sent a working group to the Group to arrange a holistic risk management plan. The working group appointed CICC to conduct due diligence on the Group, but there has not been much progress so far.
- As of the end of 2022, the Group’s total debt reached RMB 97 billion, with a total cash balance of only RMB 9.8 billion. Its net gearing ratio rose sharply to 183%. The cash to short-term debt and unrestricted cash to short-term debt ratios were 0.25 times and 0.12 times respectively, showing a significant deterioration in the Group's financial position. Even if we assume all of the bank loans are refinanced successfully, the Group still needs to repay a debt of RMB 12.8 billion within 2023, facing a large liquidity gap (RMB 8.2 billion) compared to the unrestricted cash (around RMB 4.6 billion).
- For the first half year of 2023, the Group's total contracted sales were about RMB 35.7 billion, decreased by 17% YoY, which was much lower than the peer group average. It also executed some asset disposal plans recently, such as the sale of 50% in Sino-Ocean Taikoo Li Chengdu to Swire Properties for a consideration of RMB 5.55 billion, the sale of Ocean We-Life Plaza to Easyhome New Retail Group for a consideration of RMB 360 million and the sale of several commercial projects to Sino-ocean Services to offset payables of RMB 626 million. But it is clear that the proceeds are insufficient to fill in the liquidity gap.
- The offshore bonds dropped to a default price level of $10 to $15, while the onshore bonds also plummeted to below $30. We believe that the market has priced in the default risk. It is not meaningful for investors to sell at this point.
- In general, if the developers proposed a rollover plan for their onshore bonds, they might offer a similar treatment for the holders of USD bonds. However, as we mentioned in the article, “Insight into the Role of Rollover Through KWG’s Default”, the rollover is treating the symptoms but not the underlying disease; therefore, it is more likely to result in the non-payment of principal or interest on the offshore bonds, leading to actual default.
- Therefore, it is highly likely that the Group will default on the USD bonds and enter into a debt restructuring in order to settle the holistic offshore debts in a uniform manner. Given the Group’s SOE background and a certain degree of sales generation, its likelihood of a turnaround is higher than others. Therefore, bondholders may still consider holding the bonds and wait for the Group’s next development, including whether it would rescue the offshore coupon payment within the grace period.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position and the analyst who produced this report holds a NIL position in the abovementioned securities.
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