(Bloomberg) — Concerns over the financial health of Logan Group Co. have shaken investor confidence in what was seen as one of China’s stronger developers, deepening the turmoil faced by the crisis-hit industry.
Fitch Ratings downgraded the firm this week, citing a “recent disclosure of a private debt arrangement that is off its balance sheet.” Questions about the possible scale of Logan’s undisclosed debt had swirled in the weeks prior, pushing its dollar bonds to record declines and sending its shares to the lowest since 2017.
The builder’s debt had remained relatively resilient to the credit crunch engulfing the nation’s real estate sector, even as a record wave of downgrades hit its peers. But uncertainty remains over its private debt guarantees, and credit assessors have called for more clarity, as investors scrutinize the liquidity of firms whose finances were long considered more sound than the likes of China Evergrande Group.
What’s the company?
Founded in 1996, Shenzhen-based Logan focuses on residential property development. It has projects in the Greater Bay Area comprising Guangdong, Hong Kong and Macau. The company ranked 20th among Chinese developers by contracted sales last year, according to data compiled by China Real Estate Information Corp.
What’s happening?
As recently as December, Logan’s dollar bonds traded close to par. But concerns over potential undisclosed debt last month triggered a record selloff in some of the notes to around 60 cents on the dollar.
A drumbeat of reports that Logan provided guarantees to loans backing private notes have heightened transparency concerns, just as the nation’s builders are preparing to open their books for the first time since the liquidity crisis erupted.
While the company’s borrowings did not overstep Beijing’s “three red lines” metrics as of mid-2021, a 98% slump in land purchases in the second half of last year compared to the first six months raised concerns about its liquidity. Its contracted sales plunged 44% year-over-year in January.
Why does it matter?
Investors are growing increasingly wary of hidden surprises in China’s embattled property sector. More debt would mean more creditors, some of whom could demand early repayment. There’s also the risk that any undisclosed liabilities like trust loans, private bonds or high-yield consumer products would receive preferential treatment over money owed to offshore creditors. Evergrande, Kaisa Group Holdings Ltd. and Shimao Group Holdings Ltd. have all faced such obligations.
If Logan runs into liquidity trouble, it may spread a credit crisis sparked by Beijing’s clampdown on borrowing further into what were once perceived as safer areas. In doing so, it would potentially further restrict refinancing channels even for stronger developers. A prolonged and deepening liquidity crisis among Chinese builders is impacting property investment and dragging on the economy.
What does the company say?
Uncertainty over Logan’s private debt has challenged investor confidence. The company last month denied it had any privately placed debt before reportedly telling investors its guarantees on such notes didn’t exceed $1 billion.
The developer this week responded to recent reports that it was considering a change in auditor, while stressing that “the current productions and operations of the company are normal.” A recent wave of auditor resignations at peers triggered worries of a new set of risks heading into the upcoming earnings season.
Logan didn’t respond to a request for comment from Bloomberg on Thursday.
What do the ratings firms say?
Fitch downgraded Logan one notch to BB- after its disclosure of an off-balance-sheet “private debt arrangement.” The builder has the equivalent of a BB credit rating from S&P Global Ratings and Moody’s Investor Services — slightly below investment-grade territory.
Fitch said Tuesday that Logan “faces rising refinancing risk as its access to onshore and offshore bond markets appears limited.” The credit risk assessor warned that a further downgrade is possible “if Logan’s guarantee of the off-balance-sheet private debt is higher than previously disclosed or market confidence in the company worsens.” The firm’s private debt arrangement wasn’t included in audited financial statements, Fitch added.
S&P expressed similar concerns when it placed Logan on watch for downgrade last month. The ratings firm said it needed clarity on potential previously unreported debt guaranteed by the builder, and warned of the potential negative impact on its credit profile and liquidity if confirmed.
What are traders watching for next?
Investors are still searching for clarity over the true scale of Logan’s unreported debt. Two other key issues are whether the company can revive slumping sales and make more progress in raising cash. Logan and its subsidiaries face a 2 billion yuan ($314 million) bond due March 22 and a $300 million note that matures in August, Bloomberg-compiled data show.
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