Agile Property has been granted temporary relief from lenders but its woes bring into stark relief the funding challenges facing China's cash-strapped developers amid a slowdown in the sector.
“For the Chinese property sector as a whole we think the financing condition has tightened and is going remain tight over the next 12 months, both onshore and offshore,” Vincent Lam, an analyst at S&P, told FinanceAsia.
“We think refinancing risk is rising, particularly for developers that have high leverage and short-term maturities,” he said.
China’s property market has cooled sharply since the start of the year. New home sales volumes were down 12% in September compared with a year earlier, according to Morgan Stanley research. New home prices were also down in 69 of China's 70 biggest cities, data from China’s National Bureau of Statistics shows.
That's dragged on housing starts, with residential investment growth falling to single-digit percentage levels, its lowest since July 2012 and something analysts at Morgan Stanley expect to continue as developers work through their ballooning inventory.
Against this weak backdrop, Agile Property’s failure to raise fresh equity via a rights issue to pay down its debt has dampened sentiment further. The rights offering, which launched in September under the leads of HSBC, Standard Chartered and Hang Seng Bank, was intended to help the company repay a $475 million loan due this December.
However, the real estate developer’s chairman Chen Zhuo Lin was taken into custody earlier this month, forcing Agile Property to shelve plans for a HK$2.75 billion ($348 million) rights offering.
On October 25, lenders for Guangzhou-based Agile’s $475 million loan facility agreed to extend the maturity for up to $265 million of the loan due in December 2014 for another 12 months. The lenders were Standard Chartered, HSBC and Hang Seng Bank.
The remaining $210 million will be raised via a rights issue, underwritten by Chen and the controlling family. If investors do not buy additional stock in the rights issue, the controlling family will have to buy the shares themselves.
“Obviously, they’d like to reduce debt with equity. It’s the natural way for them to reduce the net gearing, by issuing new shares,” one source told FinanceAsia. “But in a worse-case scenario they’ll refinance.”
While the loan extension provides some short term relief for the beleaguered company, there are looming refinancing risks. “The bridge loan extension is positive for the company and removes the immediate liquidity risk for Agile,” S&P's Lam said. “But excluding the bridge loan, the company still has Rmb12 billion ($1.96 billion) of short-term debt due before June 2015, and we think there are still liquidity risks over the next six months.”
Crucially, the company was also able to revise a clause in its HK$2.6 billion loan facility signed in June, which stated that it would be a credit event or default if Chen ceased to be the chairman. The lenders were Hang Seng Bank, HSBC, BNP Paribas, Standard Chartered and China Construction Bank.
Sitting on losses
Foreign lenders are now likely to be more cautious about extending loans to China's real estate sector as a result of Agile Property's problems, one Hong Kong-based loans banker told FinanceAsia.
Some analysts also warn there could be further, similar scandals as the Chinese government clamps down on corruption. “Broadly, the suspension of the chairman could affect the company’s working relationship with the government," Bei Fu, an analyst at S&P, said. "Agile is not the first company in this situation and it may not be the last,” she said.
Up until recently any large international fund with exposure to the Chinese property sector probably had some allocation to Agile, which has projects in at least 17 Chinese cities, Hong Kong-based bankers noted. These investors are now sitting on losses.
Agile shares halted traded on October 3 following news that the chairman had been detained in China. Shares resumed trading on October 10 and plummeted 21% in the first few days after. They are down 13% up to October 28.
Agile was previously considered a bellwether high-yield name, alongside China’s seventh-largest property developer Country Garden Holdings, and as such plenty of top fund managers also have exposure to its bonds, which have plunged.
The Agile 2019 was quoted at a cash price of 88.75 on Tuesday, having previously dropped close to 80. The Agile 2017s traded at 93.5 and the perpetual traded at 71.5 on Tuesday.
Other listed Chinese real estate developers have also performed poorly of late.
Shares in Country Garden, controlled by the country’s wealthiest woman Yang Huiyan, have dropped 13% since the start of September and are down 36% so far this year.
Shui On Land, the property development arm of Shui On Group, has fallen 13% since the start of September and 25% year-to-date. CIFI Holdings, meanwhile, is down 7% from September, while Greentown China is down 4% in the same time period.
“They’re all in the same boat,” the Hong Kong banking source said. “Most investors have reduced holdings [in the sector]. I mean, when something like this hits, it’s not even about profits anymore. It’s about getting out.”
It isn’t clear if Chen has done any wrongdoing. In China, authorities can hold prospective witnesses and as well as suspects.
