China developer working with mystery bond buyer to clear debt

The source of the money is shrouded in mystery. But a major Chinese real estate developer appears to be trying a novel approach to resolving its debt: It is working with a buyer to purchase bonds at deeply discounted prices, and then cancelling the securities.

The moves by China Fortune Land Development (CFLD), whose default in 2021 marked the beginning of China’s property crisis, are the latest twist in a debt debacle that has left more than US$140 billion (S$188 billion) of real estate bonds in default and become a massive drag on the world’s second-largest economy.

While some details of CFLD’s approach are murky, bond investors with knowledge of the purchase arrangements say they could offer a road map for dozens of troubled real estate companies that are struggling to pay creditors – even after restructuring their debt.

The developer is attempting to eliminate some of its bonds cheaply, and outside of its restructuring agreements, via private contracts with bond holders and a third party. Some investors are willing to accept big reductions from the bonds’ principal value – known as “haircuts” – and recover a small amount of cash in the near term, rather than wait for years for larger payouts that may not materialise if the property downturn worsens.

Chinese real estate companies have defaulted on more than US$123 billion in international bonds and 148 billion yuan (S$27.4 billion) in onshore bonds since 2020, according to data compiled by Bloomberg. At least another US$59 billion of Chinese developer debt is trading at distressed levels.