April 5, 2012 / 8:19 AM / in 6 years

Bond plunge shakes Renhe's foundations

HONG KONG, April 5 (IFR) - Chinese shopping mall developer Renhe Commercial Holdings is facing an uncertain future as downgrades by both S&P and Moody‘s, dismal earnings and tight liquidity conditions threaten to shut off its access to the capital markets.

As concerns mount that the company could quickly run out of cash and face refinancing hurdles, Renhe’s bonds have dropped to 60.00 and its stock value has halved in the past month.

S&P cut its credit rating twice in March alone, to B, and warned it could push Renhe even further down the spectrum. Moody’s now rates it one notch lower at B3. Both are still on negative watch.

Without access to offshore funding, Renhe will have few, if any, other financing options to fund its operations.

At the heart of the problem is the company’s unusual business model. Renhe turns obsolete air defence bunkers into underground shopping centres. Because they are below ground, there is no land cost. However, construction costs are high, and the collection ratio is very low. The company can burn cash very quickly.

And it doesn’t have much liquidity to begin with. “They had Rmb2.1bn in cash (at the end of 2011) and if you look at S&G expenses Rmb700m, coupon Rmb800m and bank debt commitments Rmb555m, these three expenses alone will be enough to wipe out the cash balance,” said Raghav Bhandari, CreditSights analyst.

To make matters worse, replenishing the coffers is not an easy task for Renhe. It does not hold any land-use rights for most of its projects - since it may be required to surrender them should war break out. Therefore, it is difficult to obtain bank loans for its property development. And no land-use rights means sales do not have to be registered with the government, making stated sales numbers impossible to verify.

Maturity burden

In addition, tighter lending conditions are making it difficult for clients to obtain commercial loans to purchase the rights to Renhe’s plots. As a result, the contract becomes merely a piece of paper between Renhe and its clients, which also contributes to the poor cash flows, as receivables management comes under question, a Hong Kong-based analyst said.

“The collection ratio is very low,” he added.

There is a silver lining, however. Renhe still has time before its next bond maturity.

“Even though we think Renhe is able to repay its coupon, it’s yet to see how they can refinance when its first bond matures in 2015,” said another analyst in Hong Kong.

Its 11.75% bond due 2015 has an outstanding amount of US$300m, and the 13% bond due 2016 has US$600m outstanding.

The analyst added that the company’s recently announced decision not to pay dividends reflected the difficulties in tapping the bond market. The drop in the stock has been partly attributed to that move, in fact.

“Shareholders have started to feel disappointed on their cut of dividends and their use of cash on share buyback, instead of distributing dividends and needless to add its disappointing operating performance,” said the analyst.

However, these developments are further alienating the company from the capital markets. Bondholders already resented the high dividends.

“We feel that bond investors have started to notice their (Renhe‘s) regular use of bonds to pay hefty dividends and are losing confidence in them,” the analyst added.

In the past three years, the company had paid dividends of Rmb0.07-0.09 per share, according to Thomson Reuters data. The company’s earnings per share actually rose to Rmb0.25 per share in 2011, after newly adopted valuation policies. However, underlying earnings are down by more than 90%, according to CreditSights.

In fact, the latest swing in the numbers has added to the woes. “Renhe’s sales in H2 plummeted so there is complete uncertainty about sales this year,” said Bhandari, from CreditSights.

Meanwhile, rating agencies are adding to the pressure. S&P’s rating has slid three notches in less than two years, since its first time rating of BB in 2010. Moody’s has made four downgrades in that period and is currently a notch lower at B3.

The company is now a step away with Moody’s and two with S&P from highly distressed territory. (Reporting by Umesh Desai, Senior Analyst, IFR & Reuters; editing by Steve Garton, Chris Langner)

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