State-owned real estate developers have also started debt restructuring.

Author | Cao Anxun

Editor | Zhou Zhiyu

After two years of deep adjustment in the real estate industry, it has finally evolved into a new level of credit storm in this coldest sales season. Even leading real estate companies such as Country Garden and state-owned enterprises like Longbridge have been forced to initiate debt restructuring.

On September 15th, Far Ocean Group, which has been facing a tight cash flow for several months, made a big move by directly suspending the payment of all overseas debts and halting the trading of 8 US dollar bonds, and conducting a comprehensive restructuring of its overseas debts.

Far Ocean Group admitted that since 2023, its agreed sales volume has rapidly declined due to the lack of improvement in the industry's sales and financing environment. The uncertainty of asset sales has increased, and various financing activities have been continuously restricted. It is expected that the group's liquidity will still face challenges in the short to medium term.

"The group believes that the best way out is to comprehensively restructure its overseas debts, ensure that creditors are treated fairly, provide a sustainable capital structure, and lay a foundation for the stable operation of the group." Far Ocean stated.

There were early signs of this. In order to maintain its credit and repay debts on time, Far Ocean has struggled. In the first half of the year, while suspending land acquisition, Far Ocean accelerated the sale of properties and sold off core assets such as the remaining 50% equity of Chengdu Far Ocean TaiKooLi to raise funds. However, since June, the group has still faced a liquidity shortage, and the funds available for debt repayment have almost dried up.

Although Far Ocean has extended the maturity of multiple individual bills and obtained waivers for debt defaults, the total amount of debt is still substantial. A comprehensive debt management and risk management plan is urgently needed to achieve long-term sustainable operation.

The interim report shows that in the first half of the year, Far Ocean Group's agreed sales totaled 35.66 billion yuan, a year-on-year decrease of 17%. Operating revenue was 20.807 billion yuan, a year-on-year decrease of 11%. The net loss attributable to the parent company was 18.369 billion yuan. At the same time, Far Ocean's total cash resources (including cash and cash equivalents and restricted bank deposits) amounted to 7.65 billion yuan, but short-term liabilities reached 44.616 billion yuan, and the total interest-bearing liabilities were about 94 billion yuan.

Under pressure, Far Ocean finally chose to carry out a comprehensive overseas debt restructuring. Specifically, the total principal of the 8 suspended US dollar bonds is 3.92 billion US dollars, but Far Ocean stated that it has not yet determined which US dollar bonds will participate in the debt restructuring in the final plan.

Bai Wenxi, Chief Economist of IPG China, said that through this debt restructuring, Far Ocean Group can buy more time to deal with its current liquidity problems, avoid the spread of a funding crisis caused by debt defaults, provide a certain guarantee for the stable operation of the company, and facilitate the adjustment of its debt structure to better cope with future market changes.

For the industry, this is also an important event. Bai Wenxi said that this is the first comprehensive overseas debt restructuring case for state-owned real estate developers, while it has previously been limited to private real estate companies.

"This reflects the deeper pressure and challenges facing the current real estate industry." Bai Wenxi said.

It is worth mentioning that more than two months ago, two major shareholders of Far Ocean's insurance companies dispatched a joint working group to the company. More than a month ago, Far Ocean Group obtained an opportunity for debt waiver, both of which were firsts in the real estate industry. Behind the persistence and helplessness of the ocean, the real estate industry is facing an unprecedented critical moment. The coldest sales season has not faded, coupled with difficult financing, even central state-owned real estate developers are facing tight funding.

Several insiders from real estate companies have expressed that although they have obtained some funds this year, the approval process is slow and the quotas have been reduced. At least the funds have been obtained, but the situation is only slightly better than before issuing bonds, far from being optimistic.

The aforementioned individuals said, "Compared with the actual expenses of real estate companies, the funds obtained are just a drop in the bucket. There are large amounts to be paid every month, as well as the redemption of bonds and loans."

The good news is that with the frequent introduction of epic policies such as "recognizing houses but not loans" in all first-tier cities, real estate companies may see hope even in the darkest moments.

CITIC Securities predicts that the recovery of housing sales is a prerequisite for the credit recovery of the real estate industry chain. With the support of policies, the inflection point of credit recovery in the industry is also approaching. Yan Yuejin, the research director of Shanghai E-House Research Institute, also believes that first-tier cities will have a good market in September and October, and it is favorable for real estate companies in first and second-tier cities, especially in Beijing and Shanghai.

Zhang Bo, the director of the 58 Anjuke Research Institute, also stated that the market has reached its bottom, and the unexpectedly effective policies will be reflected in September. The overall performance of the Beijing market in September will be significantly better than that in August.

At that time, in the warming of the real estate market brought about by the new policies, real estate companies heavily invested in first and second-tier cities, including the ocean, will benefit greatly. Even real estate companies that have previously encountered financial difficulties may have a chance to make a comeback. For example, Rongchuang has tasted the sweetness of the new policies. The total subscription amount on the first day of the opening of Rongchuang Yihao Courtyard in Beijing reached 5.62 billion yuan.

Chen Cong, an analyst at CITIC Securities, also predicts that the fundamentals of the real estate market will stabilize and rebound from September, and the recovery will accelerate step by step. Sales in the fourth quarter of 2023 are expected to show a significant improvement compared to the previous quarter, and the annual sales of commercial housing are expected to achieve positive growth.

Officials from the ocean stated that in the future, they will continue to focus on cash flow and take multiple measures. On the one hand, they will "concentrate all necessary resources" to ensure the delivery of houses, and on the other hand, they will accelerate sales and improve the collection of payments and the implementation of financing projects. At the same time, they will speed up the disposal of assets and reduce costs and increase efficiency in core cities such as first and second-tier cities.

Zhang Bo analyzed that whether the company can emerge from the downturn depends on sales driving and accelerating cash flow to achieve a real turnaround. From the perspective of major shareholders entering, the attention to the future development of the ocean is increasing. The next step is expected to strengthen internal management and control and provide support at the financial level.

After experiencing debt restructuring of several leading real estate companies such as Country Garden, Evergrande, and Rongchuang, creditors are increasingly aware that it is better to negotiate debt restructuring together and reach the shore together than to sink together. The experience of debt restructuring in the real estate industry is also becoming more mature, and they are willing to provide credit enhancement, such as extension, interest rate adjustment, debt-to-equity conversion, and other measures. Many real estate companies have already returned to normal operations or are about to do so.

After many real estate companies have fallen, the real estate industry can no longer afford to have another giant fall. Debt restructuring and continued operations have become a common consensus in the game between real estate companies and creditors. The survivors in this industry will join forces in the recovery battle of the real estate market, and the king of the new real estate world will emerge from it.