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- 4 October, Fantasia announced they did not make the payment for FTHDGR 7.375% 04Oct2021 Corp (USD) that was due on the same day. Given that there was no grace period for the bond, it was considered an immediate default with an outstanding principal of 206 million USD. The price of this bond was still close to par value on the last trading day last week, so it was definitely beyond market expectations.
- Since last Tuesday (28 September), the stocks trading for Fantasia (Stock Code: 1777.HK) and its property management subsidiary Colour Life (Stock Code: 1778.HK) were halted. At the time, Country Garden Property Services announced that the Group agreed to acquire 100% of the equity interests in Link Joy Holding (a core asset of Colour Life), with a total consideration of less than 3.3 billion RMB. Fantasia cannot directly use the proceeds for debt repayment since it is not a sale of its stake in Colour Life, but a sale of Colour Life's underlying assets only.
- The situation then took a sharp turn. Yesterday (4 October), Country Garden Property Services’ announced that it had given Colour Life a 4-day loan of 700 million RMB on 30 September. Since Link Joy Holding stakes was a collateral, Country Garden Property Services transferred the target shares to themselves when Colour Life failed to pay the loan. The amount of the loan was considered as the second instalment paid for acquiring Link Joy Holding. (First instalment: 2,300 million RMB; second instalment: 700 million RMB; third instalment: 300 million RMB).
- According to a Fitch report, Fantasia had 200 million USD cash in offshore accounts as of end August 2021, which should be sufficient for repaying the bond due on 4 October. However, the Group used 102 million USD to repay a private bond that was due on 28 September. Since that private bond was guaranteed with an off-balance sheet nature, the public had no clue of its existence. Fantasia also pointed out to Fitch that no other offshore off-balance sheet borrowings existed beyond the private bonds that had a size of 150 million USD.
- Fantasia held 24.4 billion RMB of bank balances and cash (excluding the 2.7 billion held by Colour Life) at the end of June, Fitch also mentioned that it had 10 billion RMB cash at the holding company level. Theoretically, the Chinese property developer should be able to repay a 200 million USD bond. It is more bewildering as the management had indicated they had the funds to repay this bond due in October, and both the Group and its key shareholder Zeng Jie had repeatedly bought back the bonds in open market.
- From the sales perspective, according to China Index Academy, Fantasia’s contracted sales in the first 9 months of 2021 increased by 25% YoY (industry average: +8%); monthly sales in September was 3.6 billion, down 32% YoY (industry average: -35%); both numbers do not seem to have deteriorated significantly.
- Some investors may wonder if there were unexpected scenarios that left Fantasia transferring the money into its offshore account. However, according to our understanding, bond issuers usually convert the money into RMB using a cash pool, which should not raise any concern on the source of funds. For debt repaying purposes, the same money pool can be converted into foreign currencies. Therefore, we believe that the cash flow of Fantasia was likely exhausted, and the Group did not have enough cash even in their onshore account.
- This case is suspicious and similar to Sinic Holdings where it collapsed abruptly last month, thereby raising doubts about the financial figures published on their statements.
- Nonetheless, the bond now is in default and at the point of no return. It is expected to trigger a series of cross-default for remaining bonds even if Fantasia is able to repay later. If the numbers on the statements are real, Fantasia’s stakes in Colour Life (about 67%) and land bank (11.86 million sq.m as of end-June, excluding the urban renewal projects) should provide certain recovery value for its bonds. It may be underpriced now given that market is trading the bonds across the curve at $20 level.
- We are still in the midst of understanding Fantasia’s default, and will provide further updates when we have more information.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in FTHDGR 7.95% 05Jul2022 and
FTHDGR 6.95% 17Dec2021, and the analyst who produced this report hold a NIL position in the abovementioned securities.
FTHDGR 6.95% 17Dec2021, and the analyst who produced this report hold a NIL position in the abovementioned securities.
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