Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

The way business works in China often baffles Western bankers. Sometimes "face," a matter of honor, can have a greater bearing on decision-making than rationality. That might explain why Glorious Property Holdings could make good on a $26.5 million coupon payment it missed earlier this week before the 30-day grace period elapses.

The company told Bloomberg News that "management is arranging funds for the coupon payment" and expects to make it before the first week of October. It's unclear what incentive Glorious has to do that. Perhaps, some investors have concluded, founder Zhang Zhirong is more concerned about his standing in society and with banks than about his personal objectives.

Zhang has every reason to push the company he controls to default on the $400 million of offshore dollar bonds. Total debt, for one thing, has now reached more than 2.6 times shareholder equity, a level that can be considered unsustainable.

Buried in Debt
Glorious Property's debt almost doubled since 2011 and now is 2.6 times shareholder equity
Source: Bloomberg

It's been more than a year since Glorious was able to pay interest expenses with earnings -- which helps explain why it wasn't able to make the last two offshore coupon payments on time.

Borrowed Time
The last time Glorious Property reported being able to pay interest with operating earnings was 2014
Source: Bloomberg

The more the company borrows to pay interest, the higher its debt costs. Glorious also is becoming less able to borrow for longer periods. Now, 99 percent of the Shanghai-based developer's debt is due within a year. At the end of June 2014, 76 percent of its borrowings had longer maturities.

This is the kind of situation when most serious CFOs in the U.S. start calling restructuring advisers. The best chance for the survival of the business, common sense dictates, is to stop all debt payments and bring creditors to the negotiating table.

That path would also help Zhang, who has said he wants to take the company private -- a declaration that hasn't helped the business. Given the debt burden, if Glorious were to be restructured in the Western manner, equity holders would be diluted and the stock probably would plunge, making delisting cheaper.

Bonds would also drop, and Zhang could adopt a traditional loan-to-own strategy, acquiring the debt on the cheap and ending up with a much bigger stake in the company once borrowings were converted to equity. 

Asian creditors seem convinced that will not be the Glorious choice. The bonds are trading at 90 cents on the dollar even after the coupon miss. The stock rose Tuesday and Wednesday, after the company said the payment would be made. These investors see something outside the rational. They'd better be right.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net