After Greenland USA said it had commitment and resources to complete Pacific Park, parent company's credit rating downgraded deeper into "junk"; funding for operations likely constrained

More than six weeks ago, after writing about the clouds cast by the Chinese property developer Evergrande on companies like Greenland Holdings, parent of the Atlantic Yards/Pacific Park master developer, and that the delayed platform over the Vanderbilt Yard reminds us of a company "exposed to one of the world’s most volatile economies,” I got a statement from Greenland Forest City Partners:

“Greenland Forest City Partners is fully committed and resourced to complete Pacific Park Brooklyn, and our business remains unaffected by unrelated corporations around the world. To speculate otherwise would be a complete mischaracterization of our commitment to complete this world-class project in Brooklyn. We have accelerated development over the past several years with two new buildings and several hundred affordable units being delivered in the coming months.”

As I wrote, the "fully... resourced" was new, but that still raised the question whether 1) parent Greenland Holdings Corp. will meet the "three red lines" test, set by China's government, that limit borrowing and whether, if not, 2) Greenland Forest City Partners would still have the resources.

Meanwhile, the statement about commitment would be more convincing if and when they announce plans to start the platform and also how they will meet the affordable housing obligations. 

And they have not. Maybe we'll learn more at the bi-monthly Quality of Life meeting next Tuesday at 6 pm (on Zoom). I'll have a preview shortly.

New cautions

Since then, Greenland Holdings has seen its credit rating downgraded, further into junk bond territory, by both Moody's and Standard & Poor's, a reflection of its own performance and the state of property developers in China.

That makes it less likely Greenland would have the flexibility to finance the next phases of Atlantic Yards/Pacific Park, not without a partner and/or governmental assistance, at least in the short term.

And its stock price reached a new low, just below 4 renminbi, though it most recently closed slightly above that, as shown in the chart at right, via Reuters. (The 52-week range is 3.96 - 6.35.)

The Evergrande crisis  

Yesterday, the New York Times reported As China’s Property Crisis Spreads, Beijing Says There’s Nothing to See:

Global markets just weeks ago were fretting over the possible failure of China Evergrande Group, the world’s most indebted property developer. Central bankers and financial figures considered the impact that its more than $300 billion of unpaid debts would have on China’s economy if Beijing stuck to its commitment not to provide a bailout.

The tumult at Evergrande appeared to die down more recently after the company made payments on multimillion-dollar bonds. But its financial woes have already set off a broader panic that has contributed to a wave of defaults among other developers. And their troubles are mounting.

The article did not mention Greenland, but warned of a general spillover effect, and noted that the United States Federal Reserve flagged the pressured on Chinese developers "as a potential risk to the American economy in a report this week."

From the Federal Reserve

Federal Reserve's November 2021 Financial Stability Report cited impacts from China as the third most-cited potential shock over the next 12 to 18 months:

Stresses in China’s real estate sector could strain the Chinese financial system, with possible spillovers to the United States

In China, business and local government debt remain large; the financial sector’s leverage is high, especially at small and medium-sized banks; and real estate valuations are stretched. In this environment, the ongoing regulatory focus on leveraged institutions has the potential to stress some highly indebted corporations, especially in the real estate sector, as exemplified by the recent concerns around China Evergrande Group. Stresses could, in turn, propagate to the Chinese financial system through spillovers to financial firms, a sudden correction of real estate prices, or a reduction in investor risk appetite. Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States.

That said, inflation and COVID are even greater risks, as shown in the chart.

Back to Evergrande

The Times reported:

“The fundamental situation for Evergrande hasn’t really changed,” said Matthew Chow, a China property analyst and director at S&P Global Ratings. “We remain sure that default is almost a certainty.”

Another potentially devastating deadline for Evergrande approaches on Wednesday, when the grace period on $150 million worth of bond payments will end. It is unclear how Evergrande has been able to secure the money needed to make its recent payments when the company has no cash, no one is buying its apartments and a very long line of creditors stands outside its doors.

What's next, according to the Times:

The National Development and Reform Commission summoned some of the country’s biggest developers to a meeting in Beijing last month and called on them to make “active preparations” to meet payments to foreign investors. The regulator emphasized the importance of following “financial discipline and market rules.”

While Beijing had previously indicated that it would not intervene to save Evergrande — part of a wider strategy to clean up the sector’s debt problem — the Chinese authorities have a history of quietly rescuing the country’s corporate giants.

This morning Reuters reported, Evergrande teeters on edge of default as $148 mln payment falls due.

Declining confidence, and downgrades

Bloomberg News reported 11/4/21 China’s Developer Bond Slump Deepens as Selling Spreads Onshore, noting:

China’s property firms are caught in a vicious circle where surging borrowing costs make refinancing upcoming maturities prohibitively expensive, thereby triggering further losses in their bonds as traders price in potential haircuts. A slowing property market and strict rules on leverage are adding to their challenges, while credit assessors are downgrading the industry’s companies at the fastest pace on record.

The article didn't mention Greenland, but noted:

Confidence in the real estate sector -- that by some estimates accounts for nearly a quarter of gross domestic product -- has been worn down by China Evergrande Group’s cash crunch. Chinese borrowers have defaulted on more than $9 billion of offshore bonds this year, with real estate firms accounting for a third of that. 

Indeed, 10/14/21, Reuters reported a broader impact, in China real estate shares, bonds hit by Evergrande concerns:

Other Chinese developers have also warned they could default on bond payments, and rising risks on Wednesday led credit rating agency S&P Global to downgrade two of the sector's bigger companies, Greenland Holdings (600606.SS) - which has built some of the world's tallest residential towers - and E-house (2048.HK).

That article, as noted below, missed another downgrade, from Moody's, which came a few days later.

Greenland's downgrade, via S&P

A 10/3/21 statement from S&P, Greenland Holding Downgraded To 'B+', Greenland HK To 'B' On Impaired Funding, Weak Operating Conditions; Outlook Neg.

Note that lowering Greenland's long-term issuer credit rating was lowered to B+ from BB, skipping B-, which put it at the fourth notch of junk. (That's worse than the Moody's rating, cited below.) S&P's conclusion:

Greenland's impaired access to both onshore and offshore capital markets is unlikely to improve in the short term.

The company's narrower funding channel will limit its financing options, especially compared to peers that are still rated in the 'BB' category. Despite a slight recovery in funding access after the announcement of its interim results, Greenland's bond prices have deteriorated sharply again following wider investor concerns over the sector.

A sign of optimism:

Greenland's access to bank financing is unaffected, in our view. We expect the company to continue to have access to its major banks, given its established relationships and a gradual improvement in meeting the three red lines requirements. These bank loans are generally project loans secured by projects assets and are repaid as projects progress. Greenland's assets remain sufficient, with only 38% of the inventory pledged for borrowings.

But S&P warned that, "Given Greenland's high concentration on bank funding, any weaknesses in bank support represents a key risk."

S&P's negative outlook "reflects our expectation that the company's cash level could continue to deplete over the next 12 months due to weaker sales and cash collection." 

Also, general contagion in the industry could be painful.

Greenland's downgrade, via Moody's

A 10/18/21 announcement from Moody's, Moody's downgrades Greenland Holding's and Greenland HK's ratings; places ratings on review for downgrade. The corporate family rating (CFR) of Greenland Holding Group Company Limited was downgraded one notch, to Ba2 from Ba1, the highest notch in "junk" territory.

Moody's was wary:

"The downgrade reflects our expectation that Greenland Holding's credit metrics and liquidity will weaken over the next 6-12 months amid tight funding conditions and the company's large debt maturity," says Kaven Tsang, a Moody's Senior Vice President.

"The review for downgrade reflects the uncertainty over the company's ability to generate enough operating cash flow to materially reduce its debt to more sustainable levels while maintaining ongoing access to funding and adequate liquidity, given the tight funding environment in the property sector," adds Tsang.

Moody's noted reasons for some optimism, but pointed to caution regarding spending in the near term:

Greenland Holding's CFR continues to reflect the company's large scale, good geographic and product diversification in China; and better access to onshore bank funds than its privately-owned property peers in China, given its linkage with the Shanghai government.

However, the CFR is constrained by the company's high exposure to the construction sector, which drags the company's overall profitability; and its weakened access to debt capital markets, which raises its challenges to refinance its sizable offshore debt maturities.

Moody's believes Greenland Holding is unlikely to issue new offshore bonds at reasonable funding cost to refinance its maturing debt over the next 6-12 months. It would likely use internal cash to repay its debt, which will reduce the funding available for its operations over the next 12-18 months.

Moody's noted the ownership:

Headquartered in Shanghai, Greenland Holding Group Company Limited is a state-controlled enterprise that primarily focuses on the real estate sector, with businesses in construction, finance and auto dealerships as well. The Shanghai SASAC [State-owned Assets Supervision and Administration Commission] indirectly owns 46.37% of Greenland Holding as of June 2021.