If Moody's calls bonds from Greenland Holding "highly speculative, or near default," how much incentive for subsidiary to spend in Brooklyn?

When last November I wrote about the ratings-agency perspective on Shanghai-based Greenland Holdings Group (aka Greenland Holding Group), the parent of the main Atlantic Yards/Pacific Park developer, Greenland USA, the news was ominous.

Standard & Poor's (S&P) had reversed its June decision to lift its long-term issuer credit rating on Greenland from SD (selective default) to CCC- (substantially risky). It had since sunk back to SD, with specific notes considered D or in default.

My conclusion: Greenland's subsidiary likely had little cushion of money to build out Atlantic Yards/Pacific Park, which--coupled with rising interest rates and the absenceof 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, due by May 2025) that it would support.

Yes, Greenland needs to build to recoup its ongoing, yet incomplete investment ($11 million a year through 2030) in railyard development rights, but it also has to spent perhaps $300 million on the platform. So there's also incentive to walk away--or plead poverty in negotiation.  

The situation persists. While the news from S&P did get slightly better, it was still ominous. More importantly, the ratings agency Moody's more recently has maintained such pessimism, assessing Greenland as near default and warning that offshore bondholders stand a low chance of getting repaid.

The larger context: China struggles

The larger context is that China, and many large real-estate companies there, are under severe financial strain. From the New York Times, 8/11/23, China’s Stalling Economy Puts the World on Notice, which stated:

Long the centerpiece of a profit-enhancing version of globalization, China has devolved into the ultimate wild card in a moment of extraordinary uncertainty for the world’s economy.
The risks have been amplified in recent weeks by a slew of developments.

The latter include an overall economic slowdown, a decline in exports, declining prices, and the failure of a major real estate developer, Country Garden, to make scheduled bond payments. 

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December 2022: S&P

Greenland Holding Raised To 'CCC-' Despite High Nonpayment Risk; Outlook Negative; Ratings Withdrawn At Issuer's Request, S&P stated 12/7/22:

Greenland Holding Group Co. Ltd. faces high repayment risk even upon completion of its distressed debt extensions, which have extended all of its U.S. dollar notes by a total of two years from their original maturity date.

We believe the China-based property developer's liquidity has depleted. Greenland also has continuing high repayment risk, given the extent of maturities due by the end of 2023. This consists of onshore bonds of Chinese renminbi (RMB) 7.2 billion [nearly $1 billion] and offshore loans of about RMB2.5 billion [nearly $346 million].

Still, S&P raised its long-term issuer credit rating on Greenland to CCC- (default imminent) from D (default). It also raised the rating on senior unsecured notes from D to CC, which is lower than CCC- and only two notches above default.

S&P then withdrew its ratings at the company's request. Note that companies pay for ratings; so that suggests either Greenland decided to trim its budget for ratings reports and/or it found fault with S&P's conclusions.

Cash from asset sales?

S&P concluded:

"Greenland's repayment ability will largely depend on cash collection from sales and asset disposal. Both remain hindered by weak sentiment toward distressed developers and ongoing COVID restrictions in China. 

That "asset disposal" seemingly points to assets in China. Note, however, that Greenland has sold components of its Metropolis project in Los Angeles at a loss, and has sold off three development sites within Atlantic Yards/Pacific Park, and partnered with another developer on another site.

December 2022: Moody's

On 12/20/22, Moody's issued an updated credit analysis for Greenland Holding Group Company Limited, stating that its "Caa2 corporate family rating (CFR) reflects the company's weak liquidity over the next 12-18 months, and our expectation that the company will face difficulties in raising new funds from onshore and offshore channels to address its refinancing needs."

That Caa2 rating ("bonds of poor standing," according to Moody's, so in the lowest rungs of "junk") is the equivalent of S&P's CCC, so one notch above the simultaneous S&P CCC- rating.

Greenland, said Moody's, didn't have the cash for its its debt refinancing needs over the next six to 12 months.

Not only did Greenland, as of 9/30/22, have nearly twice as much short term debt as cash, it needed some of the latter for to complete pre-sold projects, according to Moody's.

Greenland had planned a private equity placement and plans to raise shareholder loans from its state-owned enterprise shareholders, but Moody's predicted they would only "slightly improve" the company's liquidity. And while Greenland could sell assets, the market in China was weak.

Low ESG score

Moody's made note of Greenland's "very highly negative" ESG (Environmental Social & Governance) Credit Impact Score, which continues today. 

While Greenland had a moderately negative Environmental score, given its exposure to land development and climate risks, its Social score was highly negative, given its exposure to demographic and societal trends.

The main drag on the overall score was a "very highly negative" assessment of Governance, given "the company’s weak business and liquidity management, as indicated by its history of aggressive business growth strategy and sizable short-term debt maturities." 

Moody's also cited "poor financial management" in Greenland's "history of executing distressed debt exchanges," which, as far as I can tell, refers to kicking the can down the road.

Moody's: July 2023

Moody's downgrades ratings of Greenland Holding and Greenland Hong Kong; outlook negative, the firm announced 7/28/23, downgrading the corporate family rating (CFR) two notches from Caa2 to Ca, which it says is "highly speculative, or near default."

Moody's also downgraded various ratings on specific Greenland notes to C, which indicates default. (Greenland Hong Kong was slightly better.)

"The downgrade of Greenland Holding with a negative outlook reflects the company's weak liquidity and our expectation of weak recovery prospects for Greenland Holding's bondholders," said Daniel Zhou, a Moody's Analyst.

According to Moody's, Greenland on 7/25/23 announced it had repaid a bond worth $22.5 million, but a month after it was due. (A week earlier, Bloomberg had reported a default.)

"The company will have to rely on asset disposals or other fundraising plans for debt servicing, although such fundraising activities carry high uncertainties," Moody's said. (Presumably, Greenland might like to raise some money by selling pieces of Atlantic Yards/Pacific Park.)

Moody's said that, while Greenland had bought some time with bond maturity extensions, it still must pay $900 million by the end of 2024.

Moody's had bad news for offshore bondholders, suggesting their recovery prospects were "low in a bankruptcy scenario, given its high debt leverage and a large amount of financing at operating subsidiary level." That suggests subsidiaries might have debts repaid separately.

Moody's: August 2023

In an 8/4/23 update that built on the press release, Moody's explained that its downgrade of the corporate family rating (CFR) to Ca and its senior unsecured rating to C "reflects the company's weak liquidity and our expectation of weak recovery prospects for Greenland Holding's bondholders." 

(Note: Moody's in this document suggested that the previous rating was Caa1, not Caa2, which would've meant a one-notch downgrade.)

Moody's outlook remained negative. While had sales recovered somewhat in early 2023, Moody's expects sales to decrease by 10% over the full year, "as the effect of pent-up demand fades and market conditions remain challenging." That would cut profit, and narrow the possibility that earnings could cover interest payments.

Ownership

As stated by Moody's:

Through Shanghai Urban Construction Investment and Development Corporation and Shanghai Real Estate (Group) Co., Ltd., the Shanghai State-owned Assets Supervision and Administration Commission had an effective shareholding of about 46.37% in Greenland Holding as of 31 March 2023.

That, along with ownership by its executives, at least as previously described, makes the publicly traded company effectively state-controlled.