Chinese property company Sino-Ocean Group is seeking consent from lenders to defer separate amortisation repayments it missed on March 31 for its offshore syndicated loans totalling around US$3bn-equivalent, as concerns grow over its liquidity, financial performance and potential support from shareholders.
The cash-strapped developer had earlier agreed to make one-time early payments representing 5% of the loans, in exchange for a waiver of its breach of financial covenants.
After missing the payments, the company is now asking lenders to split the 5% into multiple payments, with the first portion to be repaid at the end of April.
The loans in question include an approximately US$700m club facility Sino-Ocean raised in June 2022, a HK$5.53bn (US$704m) four-year borrowing signed in June 2021, a HK$5.84bn four-year financing from June 2020 and a US$895m-equivalent four and five-year borrowing signed in June 2019.
“My understanding is most of the existing lenders are hoping to provide temporary relief to help the borrower get through this difficult period,” said a loan banker close to the situation. “A lot of the banks involved have big exposures in this credit, and thus they are in a difficult position.”
Sino-Ocean is now focused on curing the missed loan payments, even as a bigger maturity looms in two months.
A US$100m four-year tranche from the 2019 borrowing is due in June, according to Refinitiv LPC data.
The borrower has initiated talks on refinancing the dues, but is not actively pushing the deal forward, according to sources.
“People are too busy dealing with existing issues,” said a second loan banker at an existing lender to Sino-Ocean. “Let’s make it through today before we think about tomorrow.”
A short-term extension along with partial repayment for the maturing loan could be an easier way out, the banker said.
Pressure on prices
Meanwhile, Sino-Ocean's US dollar bonds have come under intense pressure, plunging 15–30 points in the past three weeks. Making matters worse was a downgrade from Fitch on April 12 of Sino-Ocean Group Holding’s issuer and senior bonds’ rating to B− from B+.
The rating agency also lowered the property developer’s US$600m subordinated perpetual bond to CCC. All ratings are on negative rating watch.
Fitch wrote in its downgrade note that the available cash on hand at Sino-Ocean cannot cover its debts due in the next 12 months, which are equivalent to about Rmb15bn–Rmb16bn (US$2.2bn–$2.3bn).
Earlier this month, Moody’s also downgraded the company, to B3, with review for a potential further downgrade.
The dramatic drop in the bond prices was first triggered by Sino-Ocean's deferral of a coupon payment of around US$20.6m on a perpetual bond due on March 21. A brief recovery of around three points followed on March 30 after the company unexpectedly reversed the decision and made the payment overnight. But its 2022 annual report released later that day, which revealed a poor financial performance and raised concerns over corporate governance, led to another plunge.
The prices were up by one to two points on April 12 on improving contracted sales. The longer-dated bonds were trading in the 30s on April 13 and the perp at 23.75. Its 6% 2024s and 3.8% 2025s last traded at cash prices of 53 and 74 respectively.
“Sino-Ocean’s creditworthiness is now called into question,” said a fund manager. “The view on a credit is sometimes based on perception. Once that perception changes, bond prices will too. In this case, bad numbers, bad signals to the market and uncertainty in China Life Insurance’s support are the culprits.”
Sino-Ocean is 29.59%-owned by China Life Insurance, a 68.37%-owned subsidiary of China Life Insurance Group, which in turn is 90%-owned by the country’s Ministry of Finance and 10% by the National Council for Social Security Fund. That translates to only a 20% stake owned by the central government with several layers in between.
A Rmb10.6bn fund transfer to associate company Sino-Ocean Capital was the main cause of the continued price drop. The company's auditor, BDO, said in a qualified opinion that the management of Sino-Ocean Capital was unable to provide information to verify that the funds were used for the designated purpose.
Sino-Ocean Capital said that the funds are designated for working capital and property investments, but the market was worried that they would be used to pay off debt, as the company has been struggling to meet its debt obligations since last year. CreditSights cited media reports that the company missed a US$20m loan payment due last August to Luso International Banking, while Great Wall International Investment VIII filed a winding-up petition against the company to the High Court of Hong Kong on March 30. The company also conducted an exchange offer last October to extend the maturity of its 6% October 2022 notes by one year.
More concerning is that the fund transfer was made under a verbal agreement.
“The net fund outflow of Rmb10.6bn to an associate company likely caught the market by surprise, given that it was also made under only a verbal agreement and likely caused the sharp deterioration in Sino-Ocean’s liquidity," said Nicholas Chen, an analyst at CreditSights.
The fund outflow resulted in a decline in the unrestricted cash balance to Rmb4.6bn by the end of 2022 from Rmb21.7bn in 2021. With a loss of Rmb15.6bn in 2022 and current liabilities totalling Rmb137.3bn, BDO raised questions on Sino-Ocean's ability to continue as a going concern.
The tight liquidity explained Sino-Ocean's previous decision to defer the perp's coupon payment to preserve cash, a reason that investors found hard to believe at the time as the unrestricted cash to short-term debt ratio was 1.16 times at the end of 2021. The ratio dropped to 0.12 times by the end of the following year.
That decision to defer the coupon also caused investors to doubt how much they can rely on China Life Insurance, Sino-Ocean's biggest shareholder.
“The initial intention of coupon deferral has triggered uncertainty on how supportive China Life is. The auditor’s qualified opinions on its financials added to that uncertainty,” said the fund manager.
Some pointed to Central China Real Estate as proof that government support may not be as reliable as expected. The property developer is seeking a distressed exchange offer to extend the maturities of three US dollar bonds due this year, even after the Henan provincial government bought a 29% stake in the company last June through Henan Railway Construction & Investment.
“The government’s effective ownership in Sino-Ocean is quite small, only around 20%, which is troubling if this state linkage is the only comfort factor that investors are relying on,” said Chen. “There is also the question on whether such implied state support will last, even if the state-owned parent has stepped in to help the company before.”