Deadbeat developer debt collection enters new phase with Shimao liquidation

China Construction Bank’s request to liquidate Shimao shows that state-owned banks are starting to take legal action to recover their money from the debt-ridden industry

Key Takeaways:

• A unit of China Construction Bank has asked a court to liquidate Shimao Group, which had a net debt ratio of 473.2% at the end of last year
• CCB Asia has taken legal action against three Hong Kong-listed Chinese real estate developers so far this year

By Li Shih Ta

A new phase of all-out war has begun in China’s sagging real estate industry, pitting struggling developers against their increasingly militant creditors seeking to recoup billions of dollars they’re owed.

Ever since a Hong Kong court ordered the liquidation of China Evergrande Group (3333.HK) in January, those creditors have been turning up their efforts to seek redress in court by filing liquidation requests, formally known as winding-up petitions. In a significant step, big state-owned banks, which typically don’t act without approval from Beijing, are joining the campaign. 

Shimao Group Holdings Ltd. (0813.HK), one of China’s top real estate enterprises, became the latest to fall victim to such a court-based assault with its announcement last week that it was the subject of a liquidation petition filed by China Construction Bank (Asia) Corp. Ltd. (CCB Asia). The unit of China Construction Bank (CCB), one of China’s “Big Four” state-owned banks, is owed HK$1.58 billion ($202 million) from the developer, whose embattled stock plunged 18.7% to a fresh record low on the day of the announcement. 

Shimao said it would “oppose the petition vigorously and continue to work towards an offshore restructuring that maximizes value for its stakeholders.” The liquidation petition “does not represent collective interests of the company’s offshore creditors and other stakeholders,” it added.

Shimao, which owns offices, residential buildings, hotels and shopping malls in Beijing, Shanghai, Hong Kong and other cities, is one of the many companies that have defaulted on their offshore debt since China tightened supervision of property developers in 2021. The company failed to make interest and principal payments on $1 billion of its offshore bonds in July 2022, and has so far defaulted on up to $11.7 billion in cumulative debt.

CCB gets aggressive

After 18 months of negotiations, Shimao first submitted terms for an offshore debt restructuring to its creditors last December. The company offered them a variety of options in March this year, including converting their debt into six- or nine-year notes or loans, or zero-coupon mandatory convertible bonds.

Among those choices, the convertible bond option allows creditors to convert their bonds into company shares at a conversion price of HK$8.50 per share after one year. However, creditors are less than enthusiastic about that option since the conversion price is more than 20 times the current stock price. A major creditor group holding more than 25% of the outstanding overseas bonds called the terms “detrimental” to creditors’ interests.

The long negotiation process and lack of results are severely testing creditors’ patience. One creditor, Deutsche Bank, had said the proposal was unacceptable and that it would prepare for legal action in Hong Kong. But now it seems that CCB Asia beat it to the punch.

This isn’t CCB Asia’s first legal action against a Chinese developer. In late February, the bank filed another winding-up petition against DaFa Properties (6111.HK), which owes it $360 million. It then filed a similar petition against Dexin (2019.HK), which owes it $350 million for 9.95% senior notes that came due in December 2022 as well as accrued interest.

Whitelisted projects

China launched a “whitelist” program for properties under development in January this year, with projects on the list given priority for financing from CCB and China’s other top four lenders, including ICBC, Agricultural Bank of China, Bank of China and Bank of Communications. The program is expected to provide as much as 3.2 trillion yuan in loans for more than 8,200 residential projects, many of whose construction has slowed or stopped due to lack of funds.

It’s worth noting that the whitelist program aims to guarantee delivery of projects under construction and isn’t designed to rescue real estate companies. That means that even if a state-owned bank grants a loan to help a developer finish a project, the bank doesn’t forfeit its right to take legal action involving other debts that developer might owe it. 

The serious real estate downturn of the last two years has produced a bumper crop of related non-performing loans (NPLs) for the banking sector. After reviewing financial results of 27 large and medium-sized banks listed in Hong Kong, Japan’s Nikkei found that total NPLs related to China’s real estate sector rose by 27% year-on-year last year. CCB, which traditionally focused on the construction industry, saw the biggest increase in real estate NPLs among the four major state-owned banks.

CCB’s latest annual results released at the end of last month show it had 48.2 billion yuan worth of real estate-related NPLs in 2023, up 43% from 33.6 billion yuan in 2022, the highest increase among the four major state-owned banks. That increase lifted its real estate NPL ratio to 5.6% from 4.4%.

No auditor opinion

The saying goes that “God helps those who help themselves,” and such self-help may be the only way out for China’s big field of heavily indebted developers. In addition to debt restructuring, Shimao is also selling off quality assets and pushing for more sales in order to secure the funds it desperately needs to work out its crippled finances as quickly as possible. But that hasn’t gone so well.

According to the company’s latest financial report for last year, it brought in revenue of 59.5 billion yuan in 2023, down 5.7% year-on-year, and lost about 21 billion yuan, similar to its year-ago loss. As of the end of last year, Shimao had total assets of 543.3 billion yuan and total liabilities of 492 billion yuan, giving it a liabilities-to-asset ratio of 88.7%. Its net debt ratio swelled to 473.2% from 302.2% in 2022.

We should note that in Shimao’s latest annual results, its auditor said it was “unable to express an opinion” on the report because the company “may not be able to realize its assets and repay its debts in the normal course of business.”

The fate of China’s property developers has been much like a low-speed train wreck, with each new phase only starting after much wrangling in the previous period. The newest phase now appears underway as banks and other creditors start to take legal action to defend their rights and interests, meaning more real estate enterprises may soon follow in Shimao’s footsteps.

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