Shimao Group’s Trust Loan Crisis

Highlight:

• Shimao Group’s USD bond prices have plunged to the USD 38 to USD 52 range, triggered by China Credit Trust’s claim that one of its trust products, guaranteed by Shimao, had defaulted. However, Shimao stated that the missed payment would not accelerate any onshore and offshore bonds reaching maturity.

• The group’s proportion of regulatory pre-sales proceeds is unexpectedly high, but it has taken proactive measures to deal with the liquidity crisis. The group will probably continue to dispose its assets and buy time to ensure the delivery of houses, in order to release the regulatory pre-sales proceeds of over RMB 10 billion.

• The low bond prices should reflect the level of default risk. It would be preferable for investors to wait for a further update before making any decisions.

Possible Default on a Trust Loan resulted in Bond Price Plunges

Last Thursday, Shimao Group’s USD bond prices have plummeted significantly. One of the bonds,  SHIMAO 3.975% 16Sep2023 Corp (USD)  plunged to around USD 35 level, with its yield higher than 60%.

The price drop is mainly triggered by China Credit Trust’s claim that there was a default on one of Shimao trust products. The trust loan is guaranteed by Shanghai Shimao Construction, one of the group’s onshore subsidiaries, and issued by a project subsidiary called Shanghai Qianyi Construction Materials Company (it holds a 30% stake of Shanghai Qianyi Construction Materials Company). The issue size totaled RMB 1.4 billion. China Credit Trust pointed out that only RMB 147 million of the RMB 792 million trust loan that was due on 27 December had been repaid. Hence, this triggered the default on the trust product.

Following to default claim, Shimao responded that it was because China Credit Trust requested an early repayment for no reason, and the related property project in Guangdong Foshan has recorded a good pre-sales figure. The group would discuss with the trustee to work out a solution. In addition, Shimao stated that the missed payment would not accelerate any onshore and offshore bonds reaching maturity.

Right now, both parties hold to their statement, and it is difficult for us to take sides. However, we believe that Shimao would engage in a negotiation with China Credit Trust as soon as possible, but avoid paying any interests or principal that is not yet due, in case more trustees demand early repayment, which would worsen its liquidity issues.

A Significant Decline in December Sales together with High Proportion of Regulatory Pre-sales Proceeds

In addition, dragged by its “selling one house to two different parties” incident and  the negative news flow, the group recorded a total contracted sales of RMB 10 billion (Source: CRIC), significantly decreased by 73% YoY. While its sales did not plunge over 90% as other distressed developers (such as Evergrande, Kaisa, and Sinic), the December decline rate was still much higher than its peers (36%).  

In December, the Group’s subsidiary, Shanghai Shimao Co., Ltd (Stock Code: 600823.CH) proposed to sell its property management segment to another subsidiary, Shimao Services (Stock Code: 873.HK). But Shanghai Stock Exchange required it to submit reports for this transaction to illustrate the necessity and fairness of the transaction. Under pressure from different parties, Shimao was forced to suspend the affiliated transaction.

On 30 December, Shanghai Shimao Construction disclosed a notice to reply Shanghai Stock Exchange’s enquiry. The notice mentioned that Shimao Group has a cash position of around RMB 69.0 billion, including RMB 52.9 billion regulatory pre-sales proceeds (77% of its total cash). If we exclude around RMB 5.6 billion cash from Shimao Services (as of the end of June 2021), the regulatory pre-sales proceeds proportion is as high as 83%. This shows the group’s liquidity is drying up, with most of its cash restricted.

The Group is Proactively Disposing its Assets and Ensuring the Delivery of Homes

In the same announcement, the group presented different measures to alleviate its short-term liquidity pressure, including cutting the operating costs, selling the assets in first and second-tier cities, discussing any possible adjustment in its debt structures with counterparties, as well as speeding up sales and accounts receivables.

In fact, the group has already completed corporate restructurings several times, disposed some assets in Mainland and Hong Kong for a combined value of around RMB 5.2 billion. It also focused on the collection of account receivables. The receivables amounted to RMB 15 billion in December, which was even higher than its amount of pre-sales in the month. According to REDD, the group will enter the negotiations of loan extensions with several trustees. From the above actions, we can see that the group has taken proactive measures to deal with the liquidity issues, instead of adopting a ‘do nothing’ strategy.

In this key moment, the group would continue to dispose its assets, including a 66% stake in Shimao Services (current market capitalization of around HKD 14.2 billion, with RMB 5.6 billion net cash on the book), around HKD 18 billion Hong Kong properties and its land bank in tier-one and tier-two cities. The group would buy time to ensure the delivery of homes, in order to speed up the cash collection from sales and accounts receivables.

It is worth highlighting that instead of being insolvent (i.e. lacking cash), around 70% to 80% of the group’s cash is restricted due to regulatory pre-sales proceeds requirements. According to REDD’s report, the group can gradually release the regulatory pre-sales proceeds of over 10 billion from January 2022. These ten billion regulatory pre-sales proceeds are expected to be a key for the group’s cash flows.

The Low Bond Prices should Reflect the Level of Default Risk

In respect to Shimao Group’s short-term liquidity issue, since 10 January, S&P, Moody’s and Fitch downgraded its issuer rating to B-, B2 and B- respectively, all with a negative outlook.

At the beginning of January, the group repaid an RMB 1.16 billion trust loan that is due on 14 January early. Currently, the group has a total amount of RMB 5.4 billion outstanding debts and interests to be repaid in January, including around RMB 1.9 billion trust loans, RMB 2.5 billion onshore bond principals and 1 billion bond interests, which indicates a sizable short-term repayment pressure.

Even so, in the first half of 2022, the group has to repay only RMB 6.1 billion onshore and offshore bond principals and interests, and its debt maturity distribution is still superior to other non-investment grade peers’. As shown in Table 1, the next USD bond will be due in July 2022, and the next after next USD bond will be due in September 2023.  Considering that the Chinese government is loosening controls at the industry level, Shimao has more room to wait for the rebound opportunities brought by the regulations.

The USD bonds are currently traded at around USD 38 to USD 52 level. We believe that the low bond prices have already reflected the level of default risk. It would be preferable for investors to wait for a further update from the group before making any decisions.

Table 1: Shimao Group’s USD bonds

If the group unsuccessfully makes the disposal of its assets and release the regulatory pre-sales proceeds for liquidity management, the group might seek maturity extension for its four onshore bonds due in the first half of this year. If its situation is not improved in next few months, taking reference from other distressed developers, the group might need to propose an exchange offer (usually maturity extension) to investors in May or June 2022, to avoid the actual defaults.

Conclusion

Shimao Group’s USD bond prices have plunged to the USD 38 to USD 52 range, triggered by China Credit Trust’s claim that one of its trust products guaranteed by Shimao had defaulted. However, Shimao stated that the missed payment would not accelerate any onshore and offshore bonds reaching maturity.

The group’s proportion of regulatory pre-sales proceeds is unexpectedly high, but it has taken proactive measures to deal with the liquidity crisis. The group will probably continue to dispose its assets and buy time to ensure the delivery of houses, in order to release the regulatory pre-sales proceeds of over RMB 10 billion.

The low bond prices should reflect the level of default risk. It would be preferable for investors to wait for a further update before making any decisions. 

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in SHIMAO 3.975% 16Sep2023 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities.