China Developers’ Defaults Spread as Languang Misses Payment

(Bloomberg) -- Chinese builder Sichuan Languang Development Co. failed to repay a local bond, marking its first default in a domestic credit market grappling with rising debt failures.

The company was not able to raise enough funds for the repayment on a 900 million yuan ($139 million) local bond that matured Sunday, which amounts to a default, according to a Monday statement from Languang to the Shanghai Clearing House. The builder said last week it might not be able to make the payment.

Languang is the latest Chinese developer to miss a payment this year, with the sector driving a record surge of domestic corporate bond defaults as Beijing has moved to curtail borrowing in the debt-laden industry. The delinquency “will also trigger cross-defaults” on local bonds and the firm’s offshore debt, said S&P Global Ratings. Languang has $1.05 billion of dollar bonds outstanding, according to data compiled by Bloomberg.

“The Languang default shows the deleveraging campaign will continue to fuel credit risk polarization in Chinese bonds,” according to Natixis economist Gary Ng. He said spreads could eventually widen for offshore notes “as investors become more selective in seeking safer investments or demanding high yields to compensate the extra risks.”

Chinese junk-rated dollar bonds, of which developers make up a large portion, recently saw their worst selloff since the pandemic roiled markets in March 2020. Fueling that has been concern about heavyweight China Evergrande Group, whose leverage is watched by the highest levels of China’s government for potential systemic risks to the economy.

Languang is one of China’s bigger builders, ranked 38th by contracted sales in 2020 according to China Real Estate Information Corp. The developer said Monday night it and its units had 4.5 billion yuan of overdue debt. China Fortune Land Development Co., which saw its first bond default earlier this year, in comparison recently disclosed its delinquency total had reached 67 billion yuan.

S&P, which downgraded Languang to D from CCC- on Tuesday, said the builder not paying the 900 million yuan bond is likely to result in a general default triggering cross defaults and accelerated payment demands on other debt, including dollar notes. The ratings firm also doesn’t expect Languang to repay 3.3 billion yuan of domestic bonds coming due the next three months. Questions about Languang’s repayment ability prompted several Chinese debt assessors to drop the firm deeper into junk territory last week.

A Languang media representative didn’t immediately reply to a request for comment Tuesday on a potential dollar bond default. One Languang unit disclosed Monday it hired a financial adviser to explore potential options for what it called a “consensual resolution” with holders of its three dollar bonds, which mature in 2022 and 2023. They’re all currently priced below 30 cents on the dollar, Bloomberg-compiled data show.

“The company’s refinancing in the public market has run into trouble since the end of 2020,” Languang said Monday. That, plus strained operating cash flow and debt accelerations imposed by some financial institutions, led to the missed bond payment, it added. The firm is making a “medium- to long-term, comprehensive” plan to resolve its problems with “strong support” from local authorities and “active coordination” of financial regulatory institutions.

Holders of two onshore bonds will meet on July 27, according to filings Tuesday with the Shanghai Clearing House.

Languang’s shares listed in Shanghai have tumbled 41% this year, one of the biggest decliners in the Shanghai Composite Index. China Fortune Land is the worst at 58%.

©2021 Bloomberg L.P.

With assistance from Bloomberg