Chinese Luxury Developer Defaults on $210 Million Local Bond

(Bloomberg) -- A Chinese luxury residential developer defaulted on a yuan bond after the coronavirus pandemic affected its sales, a reminder of the stress affecting the nation’s companies despite the surge in the stock market. Tahoe Group Co. failed to repay a 1.5 billion yuan ($210 million) local note due Monday because of “short-term liquidity difficulties” caused by the firm’s large debt size and high borrowing costs, it said in a statement to the Shanghai Clearing House. The company said sales were hurt by the pandemic. While a default in China’s property sector is uncommon, signs had been increasing that Tahoe would fail to repay its debts. The company had been seeking a strategic investor before a stake held by its parent was frozen by a Beijing court due to the latter’s debt guarantees to other companies. The default “may not be an isolated case, but neither is it a signal for a widespread debt crisis in the property sector,” said Zhou Chuanyi, a credit analyst at Lucror Analytics in Singapore. “Tahoe’s default was a combined effect of high leverage, slower turnover due to regulatory controls and the COVID-19 pandemic, as well as failure to introduce a white knight.”

Onshore defaults have totaled 48 billion yuan in 2020, down 20% from a year earlier.

Tahoe’s 7.5% yuan note last traded at a record low of 55 yuan on Thursday. Its shares fell 4.3% Tuesday, paring its gain this month to 32%. The stock has surged along with the broader market.

The default is the first by a developer in the onshore market since September 2019, when Yihe Real Estate Group failed to repay bonds worth a combined 1.06 billion yuan ($151 million).

The Fujian-based company said in Monday’s statement it has hired professional institutions to conduct debt restructuring and will come up with a debt workout proposal. It plans to raise funds via multiple channels, including introducing strategic investors, according to the statement. The repayment failure on the note may trigger cross-defaults on its other debt obligations, the statement said

A debt-fueled expansion helped Tahoe become one of China’s top 20 developers by sales in 2017, before slipping down the ladder last year, according to China Real Estate Information Corp. It sold 24.8 billion yuan worth of homes in the first half of this year, ranking 51st in the sector, CRIC data showed. The developer hasn’t disclosed how much cash it has recouped this year from contract sales.

In May, Fitch Ratings downgraded Tahoe twice by four notches to CC from B-. The rating cut followed signs of constrained liquidity at various operating subsidiaries and weaker access to funding from non-bank financial institutions, Fitch said at that time.

In an emailed statement to Bloomberg, Tahoe said operations of its various projects remain normal, adding that the default hasn’t had a direct impact on sales or construction. The developer hasn’t tapped China’s domestic bond market since September 2018. It last raised $110.5 million selling a one-year dollar note at a coupon of 11% in December, according to Bloomberg data.

By Ina Zhou and Emma Dong

--With assistance from Tongjian Dong and Molly Dai.