Chinese developer Shimao bets on $1 billion dollar bonds

(Bloomberg) — Chinese developer Shimao Group Holdings Ltd. missed payment on a $1 billion dollar bill due Sunday, the first public bond default after months of mounting stress.

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Shimao’s default is one of the largest dollar defaults this year in China, and the company has approximately $5.5 billion in offshore bonds outstanding. The luxury builder’s bonds have priced in deep levels of distress since the beginning of the year, with most notes falling to record lows of less than 15 cents on the dollar after the company missed repayment on a private note.

Shimao, whose pioneering projects include a five-star hotel built in an abandoned quarry, was once considered largely immune to the sweep that has engulfed larger peers such as China Evergrande Group and Sunac Group Holdings Ltd. The country’s 14th largest developer by contract sales has faced mounting concerns over its financial health since late last year, with industry stress taking its toll on an ever-growing array of players.

“The contagion has spread from Evergrande to Sunac and now Shimao,” said Bloomberg Intelligence analyst Kristy Hung. “That raises our concern that the scale of the debt crisis is beyond the imagination of any market guard.”

Shimao has also made no principal payments on a number of other offshore debts and has been in talks with creditors as he tried to reach “amicable solutions,” it said in an exchange application in Hong Kong. If not, “creditors have the right to demand accelerated repayment” and take enforcement action, the company said.

There is no grace period for the principal on the company’s $1 billion bond, according to the note’s offering circular, seen by Bloomberg News. The builder is one of the largest real estate issuers in China.

Shimao’s announcement of default rather than a proposed expansion plan “demonstrates the company’s weak financial situation to meet its debt payment schedule and the need for a comprehensive debt restructuring plan,” said Ting Meng, Asia senior credit strategist at ANZ Bank China. The bankruptcy was well-anticipated after the company missed a private dollar bond payment and delayed onshore debt payments, she added.

“Due to market uncertainties over debt refinancing and generally challenging operating and financing conditions, the group experienced negative developments in its credit ratings and the occurrence of principal defaults on certain of its offshore debt,” Shimao said in its filing. .

The company said in a separate statement it has sold nearly 20 more real estate projects to raise money. It also expects to be able to accelerate cash inflows from real estate sales as the real estate market shows signs of recovery. According to China Real Estate Information Corp., new home sales rose an estimated 31% in June from May in 30 key Chinese cities.

Meanwhile, Shimao Admiralty Harbor Capital Ltd. appointed as financial advisor and Sidley Austin as legal counsel to help assess capital structure, liquidity and options, the builder said in its stock exchange filing.

Shimao said it has not received notice of accelerated repayment from its creditors but has received written support from the majority of its dual currency lenders. The lenders also said they do not intend to take any enforcement action on the financing at this stage, the filing said.

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