Renhe Faces Cash Crunch as S&P Sees Bond Refinancing Risks

Renhe Commercial Holdings Co., a Chinese developer of underground shopping centers, doesn’t have enough cash to repay its creditors over the next 12 months, according to Standard & Poor’s.

The converter of civil defense shelters for retail use needs to pay $413.3 million in coupons and principal on U.S. dollar-denominated notes by May 2015, according to data compiled by Bloomberg. The company, based in the northern city of Harbin, had 1.295 billion yuan ($210 million) of cash at the end of June 2014, according to its Aug. 19 interim report.

“The financial and cash flow condition has been closely monitored by the senior management,” Rebecca Chan, who oversees investor relations in Hong Kong at Renhe, wrote in e-mailed responses to questions. The company doesn’t see it has any concerns, she said. With cash flow from operations, and proceeds from the capital market and bank loans, Renhe should have adequate resources to repay debt, as well as support its working capital and expansion needs, the company said in its interim report.

“The cash alone is insufficient to cover their immediate obligations, which is why we rated their liquidity at the weakest level,” Christopher Yip, a Hong Kong-based analyst at S&P, said by phone yesterday. “It’s all riding on their ability to refinance their offshore bonds, so we are waiting to see their plans.”

Biggest Risk

China’s real-estate industry poses the biggest near-term risk to growth in the world’s second-largest economy as home prices dropped in the most cities in two years in June, according to JPMorgan Chase & Co. Renhe’s dollar notes are among Chinese debt offering more than 10 percentage points above Treasury yields, along with those from coal mining companies Winsway Enterprises Holdings Ltd. and Hidili Industry International Development Ltd., according to Bloomberg data.

Under a base-case scenario, S&P estimated Renhe’s liquid assets from unencumbered cash, property sales, receivables and rental income will fall short by 60 to 70 percent of its obligations and commitments over the next 12 months, Yip said in a report in June. That condition has worsened after the developer reported losses last week for the six months to June 30, he said.

Renhe’s $300 million of 11.75 percent notes due May 2015 traded at 84.625 cents on the dollar to yield 37.907 percent as of 3 p.m. in Hong Kong, according to Bloomberg prices. Its $600 million of 13 percent debentures due March 2016 fetched 69.043 cents to yield 42.49 percent. They’ve handed investors returns of 32.5 percent and 17.9 percent respectively since Dec. 31.

Bond Coupons

The price gains are “speculative rather than fundamentally driven,” said Ray Choy, regional head of fixed-income research at RHB Research Institute in Kuala Lumpur. “It’s a weak property credit” with a deteriorating cash-to-liabilities coverage ratio, he said.

Due to heightened competition, Renhe didn’t add to its existing 22 shopping centers in the first six months of this year, according to its interim report. China’s support toward the consumption sector and underground mall projects remains intact, it said.

The $35.25 million coupon on the May 2015 notes is payable semi-annually in November and May. Another $78 million coupon on its 13 percent 2016 notes is due in September and March.

S&P cut Renhe’s rating to CCC in April last year, or eight steps below investment grade, signaling vulnerability to nonpayment. Moody’s Investors Service ranks it Caa3, or nine levels below investment grade.

The company reported a 914.3 million yuan valuation loss in its half-year earnings, the Aug. 19 report showed. That stemmed from a move to convert some mall space into parking lots, it said.

Before it's here, it's on the Bloomberg Terminal.