Debt-laden developer China Aoyuan tumbles after failing to meet US$651 million of payment demands triggered by ratings downgrades

By Eric Ng

Cash-strapped property developer China Aoyuan Group has failed to meet creditors’ demands for the payment of US$651 million in debt following recent credit rating downgrades. Its stock fell 12 per cent to HK$1.78 on Friday.

The non-payments may trigger other creditors to request accelerated debt repayment, as permitted under agreements entered into by the company.

“Given the liquidity issues faced by the group, there is no guarantee that the group will be able to meet its financial obligations under its other offshore financing arrangements as and when they fall due,” Aoyuan said in a filing to Hong Kong’s stock exchange this week.

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“If the group is unable to meet its obligations to repay any debt when due or to agree with its relevant creditors on the renewal or extension of its borrowings or alternative arrangements, there may be a material adverse effect on the group’s business, prospects, financial condition and operating results.”

Aoyuan is among a string of debt-laden developers including China Evergrande Group and Kaisa Group that have faced liquidity crunches and missed interest payments on their offshore debt in recent months.

China’s central bank imposed its so-called three red lines on loans for the most leveraged developers, which stopped them from taking on more debt and weakened their debt repayment capacity. This triggered downgrades of their credit ratings.

In the last few weeks Aoyuan has received two downgrades from each of Standard & Poor’s and Moody’s, and three downgrades from Fitch.

“Such ratings downgrades have led to the occurrence of certain trigger events under certain offshore financing arrangements, under which the company and or members of the group are a borrower or a guarantor,” Aoyuan said in the filing.

As a result of the downgrades, creditors have demanded payment of debt worth US$651.2 million for which it was either the borrower or guarantor.

Aoyuan said it has not met the demands, and has not reached any agreement on alternative payment arrangements with the lenders, after trying to resolve the difficult situation “consensually and amicably and within a reasonable time frame”.

The company has two big deadlines looming – a US$188 million maturity on a 4.2 per cent dollar bond due on January 20, and three days later a US$400 million maturity on an 8.5 per cent dollar bond.

It said last month that it had hired Admiralty Harbour Capital as a financial adviser and Linklaters as a legal adviser to assess its capital structure, financial condition and debt and liquidity profile.

Its stock has dived around 80 per cent since Beijing imposed the debt caps on the sector in August last year.

Separately, a proposal by Kaisa Group to exchange a US$400 million Singapore-listed bond with a new one with an extended maturity failed to gain sufficient support from bondholders, the firm said in a filing to Hong Kong’s bourse on Friday.

The offer, which expired on Thursday, was floated in an effort to relieve its liquidity crisis and give management more time to restructure its debt.

With the bond due for repayment on December 7, Kaisa said it will explore solutions, including renewing and extending its loans and selling assets to meet its obligation.

“If the company is unable to repay the existing notes at its maturity or agree with its holders on alternative arrangements, it would have a material adverse effect on the group’s financial condition,” it said.

Kaisa shares closed 8.8 per cent lower at HK$0.93 on Friday.

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