Real estate developer goes from hunk to junk

Business & Technology

Logan is yet another Chinese property developer under mounting pressure to settle its debts, with some being repaid at only 60 cents to the dollar.

Image via Logan

Chinaโ€™s debt-battered property development industry may take yet another serious hit, this time at a developer many believed was financially sound. Guangdong-based Logan Group Co. ้พ™ๅ…‰ is facing intense pressure to repay 5.3 billion yuan ($839 million) of domestic borrowings by the end of March.

  • Founded in 1996, Logan specializes in residential area developments. The firm has ranked among Chinaโ€™s top 100 property developers for a decade straight and consistently places among Chinaโ€™s top 10 by profitability, per its company website.
  • Now the firm has been downgraded by Moodys into junk status, falling two notches from B2 to Ba3. Moody VP Cedric Lai said Loganโ€™s demotion reflects โ€œrefinancing risksโ€ and is driven by its โ€œweakening liquidity due to its tight access to funding.โ€
  • Logan has already repaid 1.1 billion of its 5.3 billion yuan total debt, but is now seeking additional cash by expediting project sales and asset selloffs.

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The context: Logan was paying its bonds in full as recently as December. However, undisclosed debt in February heightened investor fears, which, in turn, triggered a record bond selloff. This past week, some bonds were being repaid at only 60 cents to the dollar.

  • Investor confidence has completely soured on Chinaโ€™s property market, and rightfully so. Besides Evergrandeโ€™s debt fiasco last fall, other firms, including Kaisa Group and Yango Group, have faced precipitous debt obligations.
  • The widespread debt failures of Chinaโ€™s property development industry forced Beijing to establish the โ€œThree Red Linesโ€ regulatory measures. These recent laws established guidance on deleveraging debt-ridden real estate firms.
  • For Logan, this bars any further borrowing to pay off its monthly debt.

Key takeaway: As investor wallets tighten amid the Ukraine crisis, time is rapidly running out for Logan to restructure its debt obligations. The invasion has sent Chinaโ€™s high-yield debt spreads to peaks not seen since last November, when Evergrandeโ€™s liquidity crisis was in full swing. The โ€œera of reckoningโ€ has still not subsided for Chinaโ€™s property development industry.