City Developments launched a $200 million senior 5-year bond tranche at 2.3%, on Mar 12, 130 bps above 5-year Sor (swap offer rate). The settlement date is Mar 23, 2021 and payment dates are Mar 23 and Sept 23. The proceeds will be used to finance the general working capital requirements and corporate funding of the Group, and/or to refinance the existing borrowings of the Group.

OCBC Credit Research reckons there are better opportunities elsewhere. “While the new issue looks around fair relative to its own curve, we do not find the pricing at 2.3% attractive, seeing fair value around 2.4%-2.5% instead,” OCBC’s report says.

The credit research team’s lack of enthusiasm is mainly due to CDL’s weakened credit profile with reported loss before interest and tax in FY2020 of $1.8 billion including the impact of Sincere Property Group. The loss excluding Sincere Property would be $18 million. OCBC warns that it may downgrade CDL should it make any significant acquisitions, including from Sincere Property.

SEE:CDL and Sincere: the blame game begins as Sincere defaults on bond

On Feb 26, following CDL’s FY2020 results announcement, OCBC had indicated that its credit metrics weakened, with net gearing (based on historical cost accounting) rising to 92% as at end-Dec 2020 compared to 61% a year ago. Net gearing based on fair value is 63%. The rise in gearing is due to lower equity as a result from impairment of Sincere. CDL also reported cash outflow, due in part to the acquisition of a 51.01% stake in Sincere last year. CDL’s interest cover fell from 9.1 times in FY2019, to 3.4 times in FY2020.

Separately, on Mar 9, Chongqing Sincere Yuanchuang Industrial, a unit of Sincere Property Group, defaulted on a RMB444.5 million ($91.9 million) bond. On March 10, Sincere Property implied on its website that City Developments, which holds a 51.01% stake in Sincere, was tardy in making decisions related to financing, in effect laying the blame for the bond defaults at CDL’s feet.  Sincere Property cites CDL as ‘controlling shareholder’ of Sincere Property Group because of its 51.01% stake.

On the evening of Mar 11, CDL issued a statement, which clarified that “CDL in fact holds a joint controlling equity stake in the Chinese developer. Under the agreed legal structure of this JV, Sincere

Property Holdings (SPHL), a company controlled by Sincere Property’s founder, and CDL will jointly control the JV on its material decisions while the existing operation team set up by SPHL previously continues to exercise direct oversight of its day-to-day operations and worksite matters.”

Sincere Property has its own eight-member Board of Directors represented by all three shareholders as follows – CDL (four), SPHL (two) and Greenland Holdings Group Co (two), CDL points out. “Even with four board seats, the legal structure of the JV does not accord CDL to have majority control of

Board decisions,” the Mar 11 statement says.

“Sincere Property has mis-represented the circumstances, the actions surrounding the investment,

the relationship between both parties and CDL’s efforts to engage the JV partners to deal proactively with the challenging operating environment,” the statement adds.

In its statement, CDL also points out there have been occasions where CDL could not support Sincere Property management’s recommendations as they contravened CDL’s corporate governance as a listed company and the recommended use of funds were not in the best interest of all shareholders.

The local developer goes on to indicate Sincere Property faced problems before CDL came on the scene. Sincere Property’s high growth strategy was disrupted by the pandemic, and the Chinese government’s intent to impose three red lines to curb excessive borrowing.

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It’s important minority shareholders understand that CDL is not Sincere Property’s parent, as the latter has RMB32.9 billion of debt, of which 78% is secured by assets. This year, RMB20.6 billion of debt matures, including RMB4.6 billion of bonds such as the RMB444.5 million for Chongqing Sincere Yuanchuang Industrial.

During its results briefing on Feb 26, CDL’s management assured media and analysts that its balance sheet was ring-fenced from Sincere Property’s problem loans. Meanwhile, analysts are wondering, in the midst of these recriminations, whether CDL will continue with its working group to improve the liquidity and profitability of Sincere Property.

In its Mar 11 statement, CDL said it will take all necessary  steps, including legal actions, to ensure corporate transparency and good governance.