David Scanlan
Thu, May 12, 2022, 3:00 a.m.·4 min read
Major China Developer Sunac Defaults as Debt Crisis Spreads
(Bloomberg) -- Sun Hongbin, dubbed the “white knight” in China for bailing out fellow billionaires and their empires, was unable to rescue his own from the property crisis that’s engulfing the world’s second-biggest economy.
Though he dipped into his own pocket to the tune of $450 million, tapped investors to buy shares and raised more than $2 billion in all, it wasn’t enough for Sun to avoid default at his Sunac China Holdings Ltd.
Sunac joins more than a dozen developers including China Evergrande Group that have defaulted on dollar bonds in the past few months, potentially inflicting more pain on global high-yield investors.
The struggles at Sunac -- China’s No. 4 developer by sales -- may herald further distress among property firms that were deemed too strong to fail just a few months ago. They also underscore how developers are straining under Beijing’s crackdown on borrowing and a housing slump that’s being made worse by strict Covid restrictions.
“Sunac’s default means that no private Chinese developer is now safe from default this year” without new financing, said Wei Chong, head of bond research at Fuhui Juli Wealth Management Corp., a hedge fund that owned Sunac’s onshore debt before selling earlier this year.
Sunac declined to comment.
For Chairman Sun, 58, the default is another setback in a roller-coaster career that’s included a separate failed property firm, a stint in prison over embezzlement charges for which he was later exonerated, and a meteoric rise to found one of the country’s biggest developers. He amassed a $12 billion fortune along the way.
Just a few months ago, Sun’s company was projected to be one of the survivors of China’s moves to reduce risk in the financial sector by limiting developers’ ability to borrow in public markets. Sunac, with Harvard University-educated Sun as its biggest shareholder, was rated BB as recently as March last year at S&P Global Ratings, two notches below investment grade. The dollar bonds that slipped into default traded at 82 cents on the dollar in December.
Sunac’s sales blossomed to about 230 billion yuan ($34 billion) in 2020, a 10-fold jump from 2015 as it benefited from surging demand in its top-tier markets of Shanghai and Beijing. The firm ranked third by contracted sales last year, according to China Real Estate Information Corp., a position it maintained in the first two months of 2022 before slipping to fourth. That growth made Sunac a stock darling for a time, gaining more than 400% in 2017 alone.
That lofty perch made Sun popular among tycoons in need.
When China’s Tesla Inc.-wannabe LeEco had cash-flow problems, Sun offered a lifeline of $2.5 billion to founder Jia Yueting’s operations. In 2017, Sun agreed to buy hotels and theme parks from Dalian Wanda Group Co. for more than $6 billion after China planned to cut off funding for billionaire Wang Jianlin. Sun also came close to buying Kaisa Group Holdings Ltd. when the troubled developer defaulted on offshore debt. He later dropped the deal.
Yet Sunac’s massive spending spree and expansion into sectors ranging from indoor ski hills to amusement parks has been raising eyebrows for years. The investments in businesses unrelated to property, which included a struggling internet company, prompted Fitch Ratings to cut the firm deeper into junk status in 2017, citing what it called its “acquisitive business approach.”
“He’s quite gung-ho,” said Cheng Wee Tan, an analyst at Morningstar Inc. “He’s always been relying on a strategy of aggressive expansion funded by leverage.”
As the liquidity crunch deepened last year following Beijing’s crackdown, Sun took steps to bolster Sunac’s balance sheet, determined to avoid a repeat of a failed property firm known as Sunco that he ran more than 15 years ago.
Sun, a U.S. citizen, dipped into his own coffers to provide a $450 million interest-free loan to Sunac, which also raised $580 million in a January stock sale and unloaded a stake in its property-services unit.
Bonds Tumble
None of it was enough to avoid default for a company saddled with almost $11 billion in domestic and offshore bonds. Sunac is now the biggest developer to default on a public bond payment this year, as Sun joins fellow billionaire Hui Ka Yan at Evergrande in failing to keep up with massive debt payments.
“The group’s contracted sales have continued to decline significantly, while access to new financing has become increasingly difficult,” Sunac said in a statement Thursday.
Sunac is trying to find state-backed strategic investors to improve the company’s credit status and restore financing capabilities, Hong Kong Economic Times reported, citing unidentified people.
Sun’s personal fortune meanwhile, has tumbled along with Sunac’s share price, which was off 61% this year before it was suspended from trading in March after the company failed to release earnings.
His net worth has slipped to $1.3 billion, a decline of $2 billion in 2022 alone, according to the Bloomberg Billionaires Index.
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