China Evergrande defaulted months ago and has been in the process of formulating a restructuring plan that is currently slated to be announced in Q3 of 2022. The Chinese real estate industry credit crisis continues to play out with the occasional news from the broader market such as Zhenro Properties (6158:HK) defaulting on two of its offshore bonds recently. This begs the question as to whether there are many more Chinese real estate players facing impending defaults from the credit crisis.
What is happening to EC World REIT & Dasin Retail Trust?
Inevitably the dire Chinese real estate environment would hit closer to shore as we see news surfacing from two China focused S-REITS, EC World (SGX:BWCU) and Dasin (SGX:CEDU). The auditors of these two companies have flagged a material uncertainty in their ability to continue as a going concern with an unqualified opinion due to the companies being in a net current liability position as a result of a significant portion of their debts being due soon.
The going concern assessment is meant for the management of the companies to assess whether the company can continue its operation for at least twelve months from the date of the audit report. In this case, the dates of the audit report for EC World and Dasin are 4 April 2022 and 8 April 2022 respectively.
Flagging a material uncertainty with an unqualified opinion instead of an adverse opinion means that in the auditor’s judgment, while there is a material uncertainty, the REITs’ Management’s use of the going concern basis in preparation of the financial statements is still regarded as appropriate.
This means that at the date of the audit report, based on the facts existing on that date, both the Management and auditors believe that EC World and Dasin can continue operating.
Accordingly, if there is an adverse opinion, it means that there may come a point in time where the company may not be able to operate normally within the next twelve months and may default or collapse without any returns to unitholders.
EC World REIT
EC World has more than 98% of its borrowings due in 2022 and the REIT manager highlighted that the uncertainty arose because the refinancing of loans, due for repayment in May 2022 and July 2022, were not completed at the time of the issuance of the financial statements.
The REIT manager also said that the refinancing exercise for all onshore and offshore term loans due in 2022 are in the final stages of negotiation and believes the REIT can continue operating as a going concern.
Dasin Retail Trust
Dasin which has more than 75% of its borrowings due in the next twelve months has seen its share price tumble over the past year as its troubles started then. Their offshore facilities were originally scheduled to mature on January 2021 and July 2021 and Dasin entered into supplemental agreements multiple times to extend the facility by a few months each time. In the meantime, not only has it been trying to sell off its assets but it’s Chairman and controlling shareholder has sold some of his stake which amounts to approximately 5% of the company, to ARA asset Management.
On 19 March 2022, Dasin entered into a non-binding memorandum of understanding (the “MOU”) with one of its major unitholders to explore a potential divestment of Shiqi Metro Mall and Xiaolan Metro Mall, retail properties located in Zhongshan, Guangdong Province.
Dasin has S$663.7 million of borrowings due in 2022 and Shiqi Metro Mall and Xiaolan Metro Mall were valued at 2.81 billion yuan and 2.02 billion yuan respectively for a total of 4.83 billion yuan or S$1.03 billion as at Dec 31, 2021. These two assets form 43% of investment properties and it is clear that Dasin is looking to sell of its prized assets to meet its financial obligations.
How about the other China focused S-REITs with Chinese sponsors?
The two other China focused S-REITs with Chinese sponsors are Sasseur REIT, BHG Retail REIT (Note: the fifth China focused S-REIT is CapitaLand Retail China Trust, with Capitaland as its sponsor).
Sasseur REIT’s borrowings are due in 2023 at the earliest and do not pose a problem currently. BHG Retail Reit also cut it close as it finalised the refinancing of both its offshore and onshore secured borrowing facilities due this year in March 2022.
What does the downside risk look like?
In the event that the companies are unable to refinance their debt, the companies will be suspended indefinitely from trading on the Stock Exchange until they are able to prove to the Exchange that they are able to resume trading. This is to ensure a fair, orderly and transparent market and to resume trading, the companies will need to demonstrate that the state of affairs of the companies are certain and sufficient information can be provided to shareholders to make an informed decision.
If the companies are unable to refinance their debt after a period of time, the companies will be forced into a liquidation process and consequently the assets may be sold at fire-sale prices to meet its liabilities and shareholders may not be left with much or any at all.
How about the upside potential?
Should EC World and Dasin succeed in refinancing their debt, this will remove the overhang on the companies and the share price will definitely rebound to a more appropriate valuation. However, cutting it so close may cause a blemish as investors have been put through a rollercoaster ride.
Closing statement
The survivability of EC World and Dasin boils down to whether they are able to refinance their debt. The Annual General Meetings of both companies are being held in the next one month and investors will be looking to the management for answers or interim updates at the very minimum and as they eagerly await the successful refinancing of the companies’ debt.
Unless an investor is sure that the companies are able to refinance their debt, with downside risks such as default or a collapse looking to be much more frightful than the upside potential in a successful refinancing, investors may be better off looking for opportunities with a better risk-reward return ratio.
