Banking & Finance: Builder Defaults on Dollar Bond

(Wall Street Journal) -- A developer of industrial parks joined the ranks of Chinese companies defaulting on international borrowings, with its failure to repay a maturing bond casting doubt over the entirety of its $4.6 billion in dollar-based debt.

The debt difficulties at China Fortune Land Development Co. follow a series of defaults by other sizable Chinese groups such as Tsinghua Unigroup Co., a player in the country's push for self-reliance in semiconductors, and state-owned commodity trader Tewoo Group Co.

While eager to support growth and avoid market turmoil, Chinese authorities have grown more tolerant of defaults in recent years, both by private companies and state-backed ones, as they try to erode market assumptions that investors will always be made whole.

China Fortune Land didn't repay holders of a $530 million note due Sunday, prompting Fitch Ratings to downgrade it to a "restricted default" rating Tuesday morning Hong Kong time. The company has $9.8 billion of bonds outstanding, including $4.6 billion of offshore bonds, according to a February note from credit analysts at Goldman Sachs.

Last week, China Fortune Land said it needed time to fix a short-term cash shortage, adding that it aimed to seek a "consensual resolution" with offshore bondholders and to treat domestic and international creditors fairly and reasonably. The company said it had missed payments on the equivalent of $1.7 billion of onshore loans and offshore bonds.

China Fortune Land's bonds have been trading at deeply distressed levels for weeks, but analysts said the default was still surprising.

"This shows that the government is dead serious about letting weaker companies default," said Owen Gallimore, head of credit strategy at ANZ. "This is a problem for the wider market because if you exclude blue-chip state-owned enterprises and financials, it's all about implicit support."

Mr. Gallimore said China Fortune Land would be the biggest international defaulter on record from China.

Fitch didn't say whether the default on maturing debt would trigger cross-default on the company's other international bonds. It also withdrew its rating, saying China Fortune Land would no longer share the information needed for it to continue assessing the group's creditworthiness. The company didn't respond to a request for comment.

Chuanyi Zhou, a credit analyst at research firm Lucror Analytics, said the company's ties to local governments, for which it has built a series of developments, had led some market participants to consider it similar to a local-government financing vehicle. "It is a big deal for investors that even a company like that did not get a bailout," she said.

Investors have focused on the risks posed by property developers, who make up a big part of the Chinese offshore bond market. Many are heavily indebted, and the sector is coming under greater regulatory pressure. Banks are told to cap property lending, and a system of "three red lines" essentially requires the weakest players to cut debt. Some cities have also imposed restrictions to damp housing-market speculation.

China Fortune Land isn't a typical residential developer. It was founded in 1998 with roots in Hebei, the province surrounding Beijing, with a focus on building industrial parks for local authorities. But it has since branched out into home-building, often on sites adjacent to its industrial areas – a problem given recent curbs on new home sales in Hebei and nearby regions.

In a research report last month, Moody's Investors Service highlighted China Fortune Land's rapid expansion and its use of "public-private partnerships" as contributing to its high debts.

The company's Shanghai-listed stock has tumbled 48% in the past three months, according to FactSet.

By Xie Yu and Frances Yoon