The default of Licao Group: Under the pressure of debt repayment, can offer repurchase solve the debt problem?
Article: To good finance li Gao group a paper announcement caused market concern.On March 14, Licao Real Estate Group Co., LTD. (” Licao Group “) announced that it offered to repurchase outstanding principal notes in April 2021, May 2020 and August of that year.The company plans to repurchase at least $177 million or 90% of the Outstanding Amount of the April 2021 notes, at least $275 million or 90% of the Outstanding amount of the August 2020 notes, and at least $135 million or 90% of the outstanding amount of the May 2020 notes, according to the announcement.It is worth noting that the third party agency Fitch has downgraded rigor group’s long-term foreign currency issuer default rating from “B+” to “CCC-“, believing that the cash flow of 2.15 billion yuan at the holding company level is insufficient to repay the maturing debt.On the face of it, licao’s offer repurchase announcement seems to boost market confidence compared with the previous default rating downgrade of third-party institutions, but the dismantling announcement shows that the offer may still be difficult to solve the debt.Ligao Group offer buyback behind: us dollar debt slump, with new debt to repay the old debt?On March 7, Fitch downgraded ricoco’s long-term foreign currency issuer default rating to CCC- from B+. Fitch also lowered its senior unsecured rating to CCC- from B+.The announcement came after United International downgraded rigor’s international long-term issuer rating to ‘B’ and STANDARD & Poor’s placed rigor’s long-term issuer rating to ‘B-‘ on negative credit watch.Three major international agencies have downgraded the rating, indicating that li Gao Group faces risk exposure in being amplified.In 2021, Licao Group, under pressure of growth, issued two USD bonds in April and July, with an interest rate of 8% and 10.5% respectively, raising a total of 885 million USD.It is worth noting that according to the current situation of bond interest in the real estate industry, 7% is already a high-interest DOLLAR bond. Behind such a high coupon, real estate enterprises may be facing greater liquidity pressure.According to the official disclosure information, its financial leverage level has increased significantly, and the asset-liability ratio has exceeded 80% for three consecutive years. In terms of the three red lines, the asset-liability ratio after excluding advances is 78.1%, the net liability ratio is 48.7%, and the ratio of unrestricted cash to short debt is 1.44, one of them.From the overall debt structure, as of the end of the second quarter of last year.Licao Group has liquidity liabilities of 63.061 billion yuan, among which short-term debts due within one year amount to 8.593 billion yuan.In addition, in terms of long-term liabilities, there were 16.569 billion non-current liabilities, including 14.37 billion yuan of interest-bearing liabilities.In terms of short-term debt, Ricao has $541 million of bonds maturing by the end of 2022.In March, the company faces an 800 million yuan syndicated loan coming due.As sales fell last year, the company’s cash flow situation deteriorated.As a result, fitch, a third-party agency, reckons that with only Rmb2.15bn in cash at the holding company level, the company will not be able to cover maturing debt.Under the heavy debt repayment pressure, Ligao Group issued an offer to repurchase notes notice, hoping to improve the debt structure.From an objective point of view, this round of offer repurchase is not so much a “buyback” as an “offer exchange” between new bonds and old bonds under limited cash payment.On the one hand, the limited cash flow of the company under the pressure of short debt makes it difficult to use the cash flow to buy back bills on a large scale. On the other hand, judging from the announcement itself, the planned buyback scale of offering to buy back at least 90% of the principal of 3 US dollar bills is not small.How to resolve this contradiction?Rigao group’s operation is “new debt to repay old debt”.Disassemble this round of li Gao group offer to buy back the announcement, it is not difficult to find some interesting place.According to the announcement, the price of the notes licao plans to buy back will include outstanding DOLLAR-denominated notes in addition to cash.For April 2021, August 2020 and May 2020 notes, cash notes will be $10 per $1,000 of principal value, according to the announcement.The rest is covered by new bonds.In other words, the buyback is essentially a repurchase of old bonds with new bonds, and the actual cash payment is only $10 out of $1,000.In general, paying for most of the buybacks in U.S. dollars does ease the pressure on companies to repay cash, but high-yielding U.S. dollar debt usually comes with a high risk that could eventually be transferred to bondholders.At present.From the rigor group’s performance of a number of dollar bonds have experienced a slump.According to public information, the price of REDPRO 9.9 02/17/24 issued by Rigor Group was still around $47 on December 29 last year, with a yield of around 54%.By March 8 the price had fallen to $24.70, giving a yield of 111%.Rigor Group bonds REDPRO 8 04/13/22 in December 29 last year, quoted at about 65 DOLLARS, the yield of 196%;But by the evening of March 8, the offer had fallen to $25.80, a drop of more than 60%.On March 4, REDPRO 13 05/27/23 was quoted at 20.062, down 12.772% for a yield of 228.718%.Such a high yield of us dollar debt, accompanied by a high risk behind, the continued decline of US dollar debt, also seems to indicate that the capital market is concerned about the risk that Licao Group faces.”From an investor’s point of view, most people in the current real estate environment may not choose to buy the high yield and risk of us dollar bonds.””If companies in the real estate industry try to raise coupons in the hope of obtaining capital injection, it may increase their own financial costs in the long run, which may also indicate that companies may already be on the edge of a liquidity crisis,” said one investor.The critical point of debt repayment is approaching, trust financing is about to expire, creditor’s rights are auctioned by banks and the repayment pressure is increasing. Behind the offer of repurchase of “old debt and new repayment”, licao Group faces risks worthy of vigilance.In fact, real estate enterprises face short debt pressure, the root cause is sales far less than expected, cash flow growth is limited.From the sales situation, in January this year, Ligao Group sales of 2.617 billion yuan, compared with 6.5 billion yuan last year decreased by 60%.Sales in February were slightly better than in January, but still in a downward trend.In terms of data, according to the announcement released by the company on February 28, Ligao Group and its subsidiaries and joint venture company achieved a total contract sales of about 4.520 billion yuan within the year, with a floor area of about 526,500 square meters, down 18.3% and 22.76% respectively year-on-year.On a monthly basis, only 1.903 billion yuan of contract sales were achieved in February.Sales are not as good as expected, making the company’s ability to repay limited, coupled with the trust financing is about to expire pressure, the company’s debt repayment ability of the critical point is gradually approaching.According to the information of trust products released by UsR.com, Licao conducted a number of trust financing in 2020 and 2021. Currently, there are a total of 8 trust products in the execution state, with a yield rate of about 8%.According to incomplete statistics, the cumulative amount of trust financing is about 2 billion yuan, among which the trust will mature at the latest in July next year.It is worth noting that most of these trust products are collateral for land and licao group guarantees.On the one hand, overall cash flow growth is not as good as expected, on the other hand, some of the company’s projects appear to have been insolvent.According to ali judicial auction information, Licao Group’s Nanchang Litou 58.5 acres of land to be auctioned.The starting price for the land is 399 million yuan.Relevant information shows that the auction of land previously mortgaged to Ganzhou Bank, bank credit to Nanchang Litou Real Estate Development Co., LTD. 60 million yuan real estate development loan line, the term of 2 years.It is worth noting that Licao Real Estate Group issued a letter of indemnity for the principal and interest of the loan, but the project bonds were still listed for auction.In addition, licao Group issued a notice on March 14 to amend the provisions on the event of default of the note contract and put forward a consent solicitation.”With no signs of a strong recovery in the market and limited financing channels, the company remains cautious about its cash flow in the near term,” the statement said.As a result, the Company is addressing cash flow management to ensure the maintenance of stable operations and the fulfillment of financial commitments, including (but not limited to) through the rollover or refinancing of our existing debt, aggressive financing opportunities and savings.”In other words, rigor is currently seeking to defer the payment of its maturing debt, which it is unable to meet at maturity, and is at risk of further defaults.As for the financing opportunities mentioned in the announcement, under the current situation, with the continuous downgrade of agency ratings and the further rise of bond interest, the company is less likely to refinance its debt in the future.From the perspective of licao Group’s development in recent years, one noteworthy fact is that the development of the group seems to be relying more on external forces.According to the financial data, in the first half of 2021, the group achieved a revenue of 9.131 billion yuan and a net profit of 1.212 billion yuan, in which the profit attributable to the company’s owners increased by 19.9% to 533 million yuan, and the profit attributable to non-controlling interests increased by 167.1% to 779 million yuan.The increase in non-controlling interests also seems to indicate that the company’s development is becoming more dependent on external resources and related parties.”The increase of non-controlling rights and interests of real estate enterprises in their financial statements may also be the performance of the increase in corporate debt. Some real estate enterprises may control the growth of book debt figures in the way of real debt, which may be reflected in the financial statements, but the proportion of debt is not high but the increase of non-controlling rights and interests, thus pulling down the overall gross margin of the enterprise.”Industry insiders said.In retrospect, licao’s current problems are linked to its aggressive land acquisition strategy.In fact, from 2018 to 2020, the land storage area of Lyco Group has been increasing. According to the disclosed data, during the three years, the land storage area of lyco Group is 10 million square meters, 14.56 million square meters and 23.4 million square meters respectively, with growth rates of 104%, 45.7% and 60.7% respectively.Relative to the increase of land storage, the net operating cash flow of the company was negative during this period due to the consumption of a large amount of capital. In 2018 and 2020, the net operating cash flow was -2.256 billion yuan and -1.194 billion yuan respectively.In 5 years’ time, high leverage has always been the main feature of licao Group’s business expansion.In addition, the debt structure is not diversified. In addition to issuing bonds, there are only equity and trust financing. The insufficient diversified financing channels may also be one of the reasons why the company is facing liquidity crunch.At the business level, Licao Group has also tried to diversify its business since 2018.For example, community business, health, medical care, education, technology, cultural tourism, property companies have all tried, but ultimately it seems not to be successful.According to the information of Tianyancha APP, licao (China) Real Estate Co., Ltd. currently has enterprises involved in management services, project cost and other fields.Write in the end: now, the winter of the real estate industry is still continuing, but the healthy development of the industry is still expected to bring new opportunities for healthy real estate enterprises.For real estate enterprises, how to seize some of the existing opportunities, further reduce the debt risk, embark on the road of healthy development is an urgent problem to be solved.For Licao Group, under short-term debt pressure, time may be running out to resolve the dilemma.Statement the stock market has a risk, entering the market to be cautious.The information in this article and the opinions of the author do not constitute investment advice.In addition: the information of the enterprise concerned is from the legally disclosed information of the enterprise.