More than a decade ago, Sun Hongbin was forced to sell its real estate business to a rival after a Chinese government’s crackdown on rising house prices caused it to run out of cash.
The China-born businessman said he learned the lesson of the failure and made a comeback with another company, Sunac China. It sold apartments in mostly rich cities like Beijing and Shanghai and grew into one of the country’s largest developers, with the equivalent of more than $ 93 billion in contract sales last year.
Mr. Sun, a naturalized US citizen in the late 50s, is now trying to prevent Sunac from suffering the same fate as China Evergrande Group EGRNF -4.73%
and other rivals who have spiraled into default after government-imposed borrowing limits.
Sunac’s fortunes have changed drastically in a few months. As recently as last fall, so many investors – and global credit rating agencies – saw Tianjin-based Sunac as one of the country’s strongest private property developers. But a sale of Chinese real estate bonds and declining confidence in home buyers have caused a prolonged market shift and industrial downturn that has put many real estate companies at risk, having previously raised billions from selling dollar bonds.
The economic background has gotten worse this year. In Shanghai, one of Sunac’s largest markets, a shutdown of the city’s 25 million residents has halted pre-sale of apartments, a major source of cash for developers. Sunac’s contracted sales in March fell 54% year-on-year, after falling 33% in February.
Last week, Sunac missed out on an interest payment of $ 29.5 million on a US dollar bond for the first time, and it is trying to raise funds within a 30-day grace period to stay afloat, according to people with knowledge of the case. The company also failed to meet a March 31 deadline to announce its 2021 results, causing a trade suspension for its Hong Kong-listed shares. Sunac’s dollar bonds were recently offered at around 21 cents on the dollar, according to Tradeweb, levels suggesting that a default is most likely.
Mr. Sun declined to comment through a Sunac spokesman. Late last year, he reached into his own pocket and provided an $ 450 million interest-free loan to Sunac, demonstrating “his long-term trust and long-term commitment to the group,” a company filing states. In recent days, Sunac has also told offshore bondholders that the company intends to make its lost dollar interest payment, according to people familiar with the matter.
“He’s lost a company before, so he does not want the same thing to happen again,” said James Wong, CEO and a fixed income portfolio manager at GaoTeng Global Asset Management in Hong Kong. “You can see he’s trying hard to pay back and not lying flat,” Mr. Wong.
Mr. Sun is no stranger to adversity. In the late 1980s, after obtaining a master’s degree in engineering from Tsinghua University in Beijing, he worked for the company now known as Legend Holdings. Ltd.
, which controls the Chinese computer giant Lenovo Group. Shortly after leaving the company, Mr. Sun was convicted by a Beijing court of abusing 130,000 yuan, equivalent to about $ 20,153, during his tenure and sentenced to five years in prison.
He was released after about a year and a half and eventually managed to have his 1992 sentence overturned. After leaving prison in 1994, Mr. Sun a housing developer called Sunco Group. It grew rapidly by scooping up land and building middle-income homes in Tianjin and more than a dozen other cities while borrowing heavily in the process.
Average home sales prices nearly doubled over the next decade, according to data from China’s National Bureau of Statistics. By 2005, however, Beijing had implemented many measures to cool the market.
Sunco’s liquidity was limited, and to prevent the company from collapsing, Mr. Sun most of it to a Hong Kong-based developer in 2006 and 2007.
“A failure is a failure and there is no excuse. We have made mistakes in areas such as liquidity management and expansion too quickly,” Mr. Sun pondered on Chinese social media about five years later, referring to Sunco’s problems.
Mr. Sun shifted its focus to Sunac, which he founded before Sunco was sold, and rode the wave of yet another housing boom in China. By focusing on sophisticated residential complexes – with gyms, cinemas, swimming pools and manicured gardens – in economically prosperous cities, Sunac’s contracted sales grew from the equivalent of $ 3 billion in 2011 with current exchange rates to nearly $ 90 billion by 2020.
Mr. Sun, who used to be a prolific blogger at Weibo, documented some of the company’s milestones.
“I received a call from an investor this morning,” he wrote one day in January 2012, the day after Sunac said it would buy a majority stake in a real estate development project from a rival. The investor had wondered about Sunac’s liquidity position and whether it was stable. “I said there is no need to worry about the cash flow. I do not stumble across the same stone twice,” Mr. Sun wrote.
That same year, he also thought that “doing business in the real estate market is like planting crops. When the weather is good and the rain comes on time, we all get a good harvest. In droughts or floods, there can be no crops.”
In 2017, Sunac was flushed with cash and spent billions expanding into the entertainment and tourism industry. It paid $ 9.3 billion for the hotel and amusement park assets of the Chinese conglomerate Dalian Wanda Group and invested in a company that mainly makes film production. Mr. Sun predicted that “with upgrades in consumption, industries like big culture, big tourism and big entertainment will grow explosively.”
Sunac ranked as China’s third-largest developer by contract sales late last year, according to CRIC, an industry data provider. Mr. Sun’s fortune also grew to more than $ 9 billion in 2021, according to Forbes. Sunac’s loans, meanwhile, also grew to $ 47.5 billion in June 2021, thanks in part to a flurry of bond sales in previous years and the company’s acquisitions.
Last July, Sunac raised $ 500 million from selling dollar bonds with coupons below 7%. Fitch Ratings, which gave bonds a highly speculative rating on BB, cited Sunac’s strong sales and ongoing efforts to reduce leverage.
Then in September, the market mood changed. A document circulating online appeared to show a request for government assistance to alleviate liquidity problems at one of Sunac’s subsidiaries. Sunac quickly said the leaked letter was a draft that was never sent. Over the next few months, its stocks and bonds fell further.
Sunac went fast to sell assets and has so far raised more than $ 3 billion by selling assets, including a minority stake in New York-listed Chinese real estate company Ke Holdings Inc.
and part of its ownership in a real estate service business. It has also transferred shares in some projects working on unfinished properties to state-owned developers and trusts.
But no developer can stay in business for long periods of time with closed loan channels, sales falling sharply for several months and facing a wall of debt maturity creeping up. This month, Fitch withdrew its Sunac rating after cutting it down to CC, which is one level above standard. It said the company has billions of dollars in debt due this year, and “diminished investor confidence” could further limit its access to finance.
Yao Yu, founder of YY Rating, a Chinese independent credit analysis firm, said that if Sunac ends up in default and has to go into a long and complex restructuring like Evergrande, it could have a bigger negative impact on market sentiment because it was been managed a lot more cautiously, yet it became a victim of the market downturn.
“Mr. Sun is a person of integrity, but all Chinese private developers have built leverage in the past and now face the same liquidity problem,” Mr. Yao said.
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