Struggling Greenland, parent of Atlantic Yards master developer, gets bond extended. Credit rating back to Selective Default. But new state support for developers.

Shanghai-based Greenland Holdings Group (aka Greenland Holding Group), the parent of the main Atlantic Yards/Pacific Park developer, Greenland USA, is struggling worse than ever, as ratings agency Standard & Poor's (S&P) has reversed its June decision to lift its long-term issuer credit rating on Greenland from SD (selective default) to CCC- (substantially risky).

From S&P

Now it's sunk back to SD, with specific notes considered D or in default.

The upshot is that Greenland likely has little cushion of money to build out Atlantic Yards/Pacific Park, which--coupled with rising interest rates and the absence, at least for now, of the 421-a tax break--provide little incentive to proceed with the long-pending two-phase platform and the six towers (and required affordable housing) that it would support. 

Coupled with Chinese policies that extend credit and also loan repayment, Greenland seems to have a short-term reprieve, but it's still unclear whether a project in Brooklyn could be any priority or whether they'd prefer to sell it off.

As described in June, Empire State Development (ESD), the state authority that oversees/shepherds Atlantic Yards/Pacific Park, played down the implications of potential default. Still, a potential reading of governing Development Agreement, as Atlantic Yards Community Development Director Gib Veconi pointed out, indicates that such a default could stall the project--unless ESD backs off.

That said, as described further below, it looks like large Chinese developers may get sufficient government support to continue their work. 

That doesn't mean that Greenland Forest City Partners--which is owned only 5% by Forest City, now part of Brookfield--can meet the May 2025 deadline to deliver the full 2,250 affordable units, since 876 (or 877) remain, and haven't started.

Greenland can't pay

It all started with a 10/31/22 statement by Greenland that it won't be able to repay $362 million on a dollar bond due Nov. 13.

“Faced with the sudden and serious impact of the Covid-19 situation in Shanghai earlier this year and the impact of sporadic local outbreaks of Covid-19 across the PRC, coupled with the negative market conditions, the Group has been experiencing significant declines in its sales and operations, which in turn affected the Group’s financial condition, in particular its cash flow and liquidity."

So Greenland proposed to extend, for the second time, U.S. dollar notes originally due June 2022. S&P said it believed "the company is vulnerable to nonpayment of its notes upon maturity in the absence of such a transaction." 

It thus lowered its long-term issuer credit rating on Greenland to CC, or extremely speculative. At the same time, it lowered the ratings on the company's senior unsecured notes from CC to C, meaning default imminent.

Greenland has offered to repay 5% of the outstanding principal plus accrued but unpaid interest.

However, "Greenland has extremely weak liquidity, given no signs of recovery in its contracted sales," S&P said, citing "fragile confidence in the property sector and COVID restrictions in mainland China."

"While Greenland had a cash balance of RMB61 billion [about $8.5 billion] as of Sept. 30, 2022, we believe it can access nearly none for debt repayment at the holding company level," said S&P, noting that "regulators [in China] have prioritized project completions as the most vital task for developers."

It's unclear how and whether that situation is parallel with its U.S. subsidiary. Note that, while Greenland has just raised $504 million from the sale of a building in Los Angeles, it's unclear what that means beyond paying off outstanding debt. 

 

Does remaining money, if any, help the parent? Or does it go to "project completions" in the United States? That seems less likely, since Chinese regulars surely care far more about domestic projects.

Getting worse

Once Greenland didn't repay the principal of $362 million, given the requested extension, S&P on 11/15/22 lowered Greenland's long-term issuer credit rating back to SD, or Selective Default.

And on 11/25/22, once Greenland completed the extension of maturity for all its U.S. dollar senior notes, Greenland lowered its long-term issue rating on Greenland's senior unsecured notes to from C to D, meaning default.

"We view the transaction as a distressed debt restructuring and tantamount to a default," S&P said. "Had the maturity not been extended, Greenland would likely have lacked the resources to fully repay them on maturity. Even with the maturity extension, Greenland faces repayment pressure from onshore bonds of Chinese renminbi 7.7 billion [$1.07B] until the end of 2023."

That said, the company's shares were up 6 percent after the extension.

State support offers optimism?

China Property Is Heading For A Transformation, And Maybe A Turnaround, Says Report, S&P said 11/21/22, suggesting that "slower-moving, state-owned developers" will dominate a smaller market, given government aid. Greenland is partly state-owned, but essentially state controlled.

"The government is taking bolder steps to restore the confidence in the sector. The rounds of support announced in November alone should add Chinese renminbi 1 trillion of fresh liquidity to the sector," said S&P Global Ratings credit analyst Lawrence Lu.

State-owned developers are said to be the most financially sound, though that's hard to say about Greenland. That said, if Greenland and its peers are too big and important to fail, well, the state may continue to give them a lifeline.

At least three dozen real estate developers have missed payments on bonds, mainly overseas ones, the Times reported 11/25/22, China Is Finally Trying to Fix Its Housing Crisis, noting that help has just arrived:

China’s cabinet called late Wednesday for banks, most of which are state-owned, to lend more money for the completion of unfinished apartments, following a similar directive by regulators put out hours earlier. China’s central bank, the People’s Bank of China, and the main bank regulator codified 16 measures on the same day to make sure that developers can borrow enough money from banks and bond investors, and can defer repayment when necessary. And on Friday evening, the central bank reduced by $70 billion the money that the country’s commercial banks are together required to hold for emergencies, freeing them to lend that money instead.

Two banks gave a total of  $105 billion in lines of credit to 13 developers, the Times reported, though Greenland wasn't specified.

Moreover, banks have been told to defer loan payments from real estate developers for a year. That suggests that the real estate companies, including Greenland, are kicking the can down the road, and will reevaluate in a year or two.

Housing is crucial to the national economy. “To save the property market is to save the economy,” said Han Xiuyun, an associate professor of economics at Tsinghua University, in an online analysis, according to the Times. 

Over the long term, though, the move from country to city, plus a decline in the country's birthrate, points to lowered demand and a shrinking construction industry.