It’s a dangerous time to buy China’s property dip

Fantasia Holdings

03/12/2021 03:30

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own. Refiles to fix links in first and fourth
paragraphs.)
    By Yawen Chen
    HONG KONG, Dec 3 (Reuters Breakingviews) - Investors buying
the Chinese property dip are in for more unpleasant surprises.
Fantasia  1777.HK , a small developer, shocked markets last
month when it defaulted on a $206 million bond despite ample
funds on its balance sheet. Now it is fighting a creditor
petition trying to put it into bankruptcy. https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1125/2021112501203.pdf
 Unfortunately Fantasia is just one of a troubled cluster of
small developers in tough straits.
     The Shenzhen-based company is controlled by Zeng Jie, niece
of a former vice president. Like its far larger peer Evergrande
 3333.HK , it has borrowed heavily in the offshore dollar
market, with some $5 billion of bonds with coupons as high as
14.5% outstanding. Such rates looked attractive: On paper, the
company crossed just one of Beijing's three debt "red lines" and
had $4 billion cash on hand at the end of June. Just days before
the payment deadline it sold a core asset in its property
services unit for $518 million and told investors it had no
liquidity problems.   
    Then it defaulted. Caught off-guard, Fitch downgraded
Fantasia from B to “Restricted Default” in a span of two days.
    There were some warning signs. Fantasia has an abnormally
high proportion of minority shareholders, a possible sign of
hidden off-balance-sheet debt  urn:newsml:reuters.com:*:nL4N2KE0C9. But a lot was
completely invisible. For example, Fitch said it learned in
October that the company had guaranteed $150 million in private
bonds without disclosing it in its financial statements, and was
on the hook to pay off $100 million of that obligation in
September. This probably contributed to the default.
      Smaller players like Fantasia in aggregate hold 60% of the
$27 billion Chinese real-estate dollar bonds coming due in 2022,
according to Breakingviews calculations based on Refinitiv data.
That helps explain why Fantasia’s small default triggered a
wider selloff in the Chinese junk bond market. While some
investors have in recent weeks started bargain-hunting bonds
near maturity for a quick gain, encouraged by mild policy
easing, there is every reason to suspect there are a lot more
Fantasias in the mix  urn:newsml:reuters.com:*:nL8N2S13H8. It’s always wise to buy low,
but only if you know what you are buying. 
    Follow @ywchen1 https://twitter.com/ywchen1 on Twitter
    
    CONTEXT NEWS
    - Fantasia Holdings said in a statement to the Hong Kong
Stock Exchange on Nov. 25 that a “winding-up petition” related
to an “alleged” loan of $149 million had been filed against one
of its major units. 
    - Fantasia missed payment on $206 million in offshore notes
that were due on Oct. 4.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Buying China's property dip: A default by a small developer
triggered a selloff, then bargain hunting    https://tmsnrt.rs/3ruogif
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Pete Sweeney and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
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