Why Did Zhenro Properties’ Bonds and Shares Crash?

Chinese property developer Zhenro Properties’ dollar bonds have collapsed to about 20 cents on the dollar in February 2022 after trading between 45-50 cents on the dollar earlier. Speculation was rife that Zhenro Properties will not call/redeem its $200mn 14.724% Perp on its next call date of March 5, 2022 in a bid to maintain sufficient liquidity. Sources had mentioned that Zhenro was preserving its liquidity as it has other dollar bonds due in the year in addition to its peers extending their bonds’ maturities. The rumors about the company have wreaked havoc across its bonds and its shares, with the latter falling 81% in a single trading session. On Friday, February 11, its Perp collapsed by 58.5 points to trade at 34 cents on the dollar. The market reaction was so strong that the move occurred despite Zhenro’s affirmation and reassurance just a day earlier that its plan to call the bond remained unchanged.

Below is a timeline of events related to Zhenro Properties:

• April 11, 2022: Zhenro Properties said that it did not pay a combined $20.4mn in coupons on two dollar bonds, thereby resulting in a default. The notes in question are its new 8.35% 2024s & 7.1% 2024s for which $8.35mn and $12.07mn were due and payable on March 10, 2022. Zhenro also added that it might not be able to pay a total $32.6mn of coupons on three other other dollar bonds before their grace periods end. These bonds are its 7.35% 2025s, 8.3% 2023s and 7.875% 2024s. All of the above bonds’ maturities were extended after Zhenro got approval from investors. However, the developer said that it does plan to pay the coupons on all the above bonds before May 31.
• February 23, 2022: Zhenro plans to sell assets worth up to RMB 4bn ($632.7mn) in H2 2021 and extend maturity of other onshore and offshore debt, including debt bank loans and asset-backed securities (ABS), as per three sources. Zhenro is said to be in talks with state-owned firms to sell the assets.
• February 21, 2022: Zhenro was downgraded to Caa2 from Caa3 by Moody's and to C from B by Fitch on the back of heightened default risk by Zhenro and its consent solicitation. It launched an exchange offer for 5 USD bonds that have a total amount outstanding of $1.05bn where the bonds will be exchanged for new 8% bonds due March 6, 2023. It also launched a consent solicitation for 8 bonds to waive events of default and any consequential breaches or defaults arising from the non-redemption of the 14.724% Perps, and non-payment of principal and interest on the $50mn 5.95% bond due March 6.  
• February 18, 2022: Zhenro said, "existing internal resources may be insufficient to address its upcoming debt maturities in March 2022, including the redemption of the Securities in full on 5 March 2022". Zhenro thereby confirmed market speculation earlier this month and reversing its statement in early January that it would redeem its 14.724% Perp on its call date of March 5. Raises consent solicitation regarding modifications to the terms and conditions with respect to the definition of “First Reset Date” and “Change of Control” and removing “Relevant Indebtedness Default Event” from the events that will trigger an increase in the “Distribution Rate”. Besides, the company has asked to waive or forgive any default arising from not redeeming the Perp. While the consent solicitation was for its Perp, Zhenro said it is considering liability management exercises related to its other offshore debt in the near future.
• February 15, 2022: Zhenro was downgraded to B from B+ by Fitch reflecting Zhenro's limited progress in addressing large capital market maturities in 2022.
• February 14, 2022: Zhenro was downgraded by two notches to B3 from B1 by Moody's on deteriorating operations after contracted sales fell materially by 41% and 30% YoY in December 2021 and January 2022, combined with weak funding access. The developer said that trading in three of its Shanghai exchange-traded bonds will be limited to institutional investors. The same day, Zhenro also denied reports that its controlling shareholder Ou Zongrong sold shares under enforced disposal after Chinese media outlet The Paper reported the news.
• February 11, 2022: Dollar bonds of Zhenro Properties crashed on speculation that the developer will not redeem its $200mn 14.724% Perp. Last month in an exchange filing, Zhenro said it would redeem the note in full. Just a day earlier, Zhenro told investors that its plan to call the bond remain unchanged. Its Perp was trading at 92.8 cents on the dollar before the speculation.
• December 13, 2021: Dollar Bonds of Zhenro Properties jumped over 5% after the property developer said that it will redeem its $100mn bond due January 13, 2022 early.

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About Zhenro Properties:

Zhenro Properties Group Ltd. is an investment holding company incorporated in 2014, principally engaged in the sale of properties. Zhenro provides sales of properties, property leasing business, provision of commercial property management services, and sales of goods and provision of design consultation services. At the time of this writing, it was China's No. 30 property developer by sales. Zhenro's TTM revenues were at HKD 46.14bn ($5.9bn) with net income of HKD 3.61bn ($460mn).