Shanghai-based Greenland Holdings, credit rating plummeting, slides closer to default; subsidiary's claim of commitment to Pacific Park requires more evidence

The news looks ominous, as The Real Deal summarized it yesterday, Default risk for Chinese parent of Pacific Park developer, a Shanghai-based conglomerate damaged by ambitious development plans and COVID lockdowns (though the latter has just eased).

Screenshot from Google Finance

Greenland Holdings Corp. (aka Greenland Holding), the Shanghai-based conglomerate that owns Greenland USA, has seen its stock price halved in two years and its credit rating plummet, as it has requested an extension to pay off bonds coming due.

That led to two, multi-notch downgrades in a week from the two main credit rating agencies, Moody's and Standard & Poor's, with S&P--though not Moody's--placing Greenland on the edge of default.

Investors "shocked"

China State-Backed Builder Rocks Bond Market With Delay Plan, Bloomberg reported 5/26/22:

A Chinese property company long considered among the nation’s most resilient shocked investors with a proposed dollar-bond payment delay, raising fresh doubts about the financial strength of the industry’s higher-rated borrowers.

Greenland Holdings Corp., whose shareholders include the Shanghai government, is asking holders of a $488 million dollar note due June 25 to delay repayment by a year, a rare sign of stress at a state-linked firm. Its bond price tumbled from highs of 92 cents on the dollar to a record low of 41 cents in recent days...

With approval of that loan extension, S&P said 5/30/22 that it would likely lower Greenland's credit rating to SD, or selective default, a classification that surely would make it tougher for Greenland to borrow at reasonable interest rates. 

Annotation of Wikipedia chart on bond rating categories

The impact in Brooklyn?

The Real Deal got a boilerplate quote from a spokesperson representing the joint venture, dominated by Greenland USA, that's the master developer for Atlantic Yards/Pacific Park:

“Greenland Forest City Partners is fully committed to continuing to fulfill our obligations at Pacific Park Brooklyn, with incredible progress underway and major milestones upcoming,” said a spokesperson for Greenland Forest City Partners. “This summer we will commence work on the platform that will support the next phase of the project.”

Well, last September, as I wrote, the statement was “Greenland Forest City Partners is fully committed and resourced to complete Pacific Park Brooklyn." (Emphasis added)

That was before the parent company's credit rating was downgraded deeper into junk--still well above where it is today.  As I wrote, it still raised the question whether the parent would meet the "three red lines" test, set by China's government, that limit borrowing.

So we don't yet have proof of that commitment, and the resources to fulfill it.

Getting the resources

Given the recent sale of 535 Carlton and 38 Sixth, it appears that Greenland Forest City Partners' resources may depend, significantly, on sales of buildings or development rights.

And there's no sign of the commitment to delivering another 876 affordable units by the May 31, 2025 deadline, when fines of $2,000/month for each missing units would be levied.

One incomplete benchmark would be starting the B5 tower (700 Atlantic Ave.) by June 15, which would allow them to take advantage of the existing 421-a tax break.

The parent company, according to S&P, is promising repayment of 10% of the outstanding principal and accrued interest, while extending bond maturities by a year, plus a a fee of 0.5% to 1.0%.

So if they renegotiate bond payments, well, it wouldn't be surprising if they try to renegotiate the obligations in Brooklyn, despite continual promises that they won't.

The request for an extension, Bloomberg reported 5/30/22, "shocked investors," because it suggested that, despite support from official bodies--Greenland's largest shareholder is the government of Shanghai--such companies may be precarious.

Indeed, the Wall Street Journal reported 5/31/22, several privately owned real estate companies in China were defaulting on bond payments, leaving some strong state-owned counterparts to buy available assets, but Greenland was not among the latter category.

Credit rating lowered last fall, worse now

As I wrote last November, after Greenland USA said it had commitment and resources to complete Pacific Park, the parent company's credit rating was downgraded deeper into "junk."

So I'll recap those two ratings actions before describing subsequent downgradings that went even farther.

October 3, 2021, S&P: two-notch drop

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

October 18, 2021, Moody's: one-notch drop

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 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 [Moody's Kaven] Tsang.

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.

December 16, 2021, Moody's: one-notch drop

A 12/16/21 announcement from Moody's, Moody's downgrades ratings of Greenland Holdings and Greenland HK; outlook negative, indicated a one-notch drop to Ba3 from Ba2, with a negative outlook:

"The downgrades reflect our expectation that Greenland Holding's and Greenland Hong Kong's property sales will fall over the next 6-12 months because of tough business and funding conditions. Weakened operations will worsen the company's profitability and financial metrics," says Kaven Tsang, a Moody's Senior Vice President. 

...Moody's expects Greenland Holding's liquidity to remain adequate over the next 12-18 months. Nevertheless, the company has sizable refinancing needs over the period. In particular, it has USD2.7 billion of US dollar bonds maturing between December 2021 and December 2022.

May 12, 2022, Moody's: two-notch drop

A 5/12/22 announcement from Moody's, Moody's downgrades ratings of Greenland Holding and Greenland HK; places ratings on review for downgrade, indicated a two-notch drop to B2 from Ba3:

"The downgrade reflects our expectation that Greenland Holding's refinancing risk will increase over the next 6-12 months, driven by its declining contracted sales and operating cash flow, as well as sizable bond maturities," says Daniel Zhou, a Moody's Analyst. 

...Meanwhile, Moody's estimates that a significant portion of the company's cash resides at the subsidiary or project levels under the property and construction segments, which could not be used to repay its debt at the holding company level.

The latter suggests that Greenland USA may be somewhat insulated, if it can raise the cash by selling more development rights in Brooklyn.

May 23, 2022, S&P: two-notch drop

A 5/23/22 announcement from S&P, Greenland Holding, Subsidiary Greenland Hong Kong Downgraded To 'B-' On Weak Liquidity; Ratings On CreditWatch Negative, indicated a two-notch drop to B- from B+:

Greenland Holding Group Co. Ltd.'s (Greenland) liquidity is deteriorating amid the industry downcycle. We have revised our assessment of the company's liquidity to weak from less than adequate due to its depleting accessible cash and declining sales...

With Greenland's limited funding channels, the company will need to heavily rely on cash flow from property sales, asset disposals, and refinancing of its onshore bank loans to meet its short-term debt maturities. 

Greenland's cash generation from sales will weaken amid tough operating conditions.We believe an imminent recovery is unlikely, given the weak market sentiment and ongoing city lockdowns in China. 

May 30, 2022, Moody's: three-notch drop

A 5/30/22 announcement from Moody's, Moody's downgrades ratings of Greenland Holding and Greenland HK; outlook negative, indicated a three-notch drop to Caa2 from B2:

"The downgrade reflects Greenland Holding's elevated liquidity risks, following its consent solicitation to extend the maturity of its offshore bond due in June 2022," says Daniel Zhou, a Moody's Analyst. 

...The proposed maturity extension indicates Greenland Holding's escalating liquidity pressure due to difficult operating and funding conditions in China's property market and its sizable debt maturities.

While Moody's said an upgrade was unlikely, it could happen "if Greenland Holding improves its funding access and materially reduces its refinancing risks."

May 30, 2022, S&P: four-notch drop

A 5/30/22 announcement from S&P, Greenland Holding Downgraded To 'CC' On Distressed Maturity Extension; Outlook Negative, indicated a four-notch drop to CC from B-:

On May 27, 2022, China-based property developer Greenland Holding Group Co. Ltd. (Greenland) commenced an offer to extend the maturity of its outstanding U.S. dollar notes due June 25, 2022.
We view the proposed transaction as a distressed maturity extension. We believe the company is vulnerable to nonpayment of its senior notes upon maturity in the absence of the proposed transaction. Upon completion of the transaction, we will assess it as tantamount to a default.

Greenland, suggested S&P, has "limited accessible cash" and its ability to sell property "remains adversely affected by the prolonged lockdown in Shanghai." That said, as of today, the two-month lockdown has eased, reports the AP.

So, could Greenland pull off a recovery? We can't rule it out. The end of the lockdown might change the outlook. Stay tuned.