Staying Afloat During the Chinese Property Market Downturn
The Chinese property market has been in decline in China for the last few years, with buyers reluctant to buy and lenders unwilling to lend. Caught in the middle are cash-strapped developers. But is the situation turning around – and what can creditors and investors do?
China’s property market was hit particularly hard. In March 2022 we wrote about how the confluence of slow sales and limited funding was affecting many Chinese developers. Add in rising borrowing costs and it’s a recipe for disaster for borrowers.
Chinese developers’ financial struggles
Things have not gone well for Chinese developers in recent years, even for the industry leaders. Evergrande Group defaulted on its debts in late 2021, but is now edging closer to revealing a restructuring plan. It’s not the only one. Besieged Logan Group’s shares lost more than half their value when the company started trading again in August, after a three-month hold, driven by Covid-fuelled construction delays and the downturn in the property market. Cifi Holdings, Shimao Group and Jingrui Holdings also suspended payment of offshore bonds, and engaged financial advisors for solutions during 2022. Meanwhile, China's biggest property developer, Country Garden, was downgraded by S&P and announced a HK$2.83 billion share sale to refinance debt and meet working capital needs, causing a significant drop in share price.
In November 2022, China’s biggest lenders were prepared to invest more than $160 billion following the call from the authorities for support. Already, China’s largest lender, Industrial and Commercial Bank of China, has pledged $92 billion support to 12 developers. Other banks are following suit. Good news in general but certainly it will take some time before we see how these gestures will ease the situation.
Chinese buyer demand remains weak
While a relaxation in lending will boost developers, Chinese house prices still remain weak, with prices falling for the 15th consecutive month.
It’s a testing time for developers – and bittersweet. The cash has started to flow again, but the demand from buyers remains low. Many companies may yet face difficulties as we head into 2023.
What are the options available for creditors, investors and business owners?
It is now, more than ever, essential for anyone in the Chinese property market to keep abreast of the situation and be prepared to take swift action as news develops. Perun Consultants recommends a proactive approach for business owners, creditors and investors who may be affected:
I. Conduct an independent business review
For companies in distress, conducting an independent business review as soon as possible is important to evaluate the situation and determine what steps can be taken to turn the business around.
II. Consider financial restructuring
If a financial diagnosis raises insolvency concerns, it is important to consider restructuring opportunities. Management is encouraged to identify potential restructuring officers, scheme administrators and independent financial advisors to allow sufficient breathing room for the business while management formulates a feasible restructuring. Perun has experience dealing with the concerns of all parties involved with these aims in mind.
Our various roles as independent business advisers involve asking the difficult questions and engaging with management authentically. The key to recovery is gaining an accurate picture of the financial and operational health of the business; a firm bedrock from which to design, consider and implement appropriate and realistic options available to turn it around while canvassing buy-in and co-operation from internal stakeholders.
III. Get a valuation
In a volatile market, conducting valuation assessments on your investments on a more frequent basis as part of the ongoing financial health check will help you make an informed decision. Shareholders and fund managers are urged to seek assistance on the valuation of their investment positions (equity or credit positions).
If an exit strategy is what you are looking for, we can also guide you through the process of asset disposal or enforcement actions.
IV. Enforcement action by creditors
Sometimes debt enforcement and asset recovery can provide a better outcome than restructuring or may be the only viable route if the debtor refuses to engage in meaningful restructuring discussions. At Perun Consultants, we have decades of experience acting as insolvency practitioners, receivers and directors in contentious matters. These roles balance the interests of lenders in order to maximise recoveries of distressed loans, or by acting as receivers or as liquidators of onshore and offshore entities to manage the orderly wind-up of distressed business, thereafter distributing any realised assets.
Gwynn Hopkins, managing director at Perun Consultants, adds: “Struggling companies should quickly turn to professional advisers for help because swift intervention may be the catalyst needed to save the business. Even those in a stronger position could benefit from independent, professional advice on how to restructure and improve their business in the new era. For creditors, paying close attention to debtor risk profiles is extremely important. Where signs of distress appear, creditors should proactively seek assistance from professional advisers and not hope that the debtor will address the issue themselves.”
Please contact us if you would like to speak to a member of our team about how we could guide you through this challenging situation and help your business.