Sunac China Holdings Faces Liquidity Crisis as Legal Woes Deepen—Traders on High Alert

Shares and bonds of Sunac China Holdings Limited (HKG: 1918) suffered a significant decline following a liquidation petition filed against the developer, igniting fresh worries regarding its potential for recovery and capacity to meet financial obligations. This legal action, initiated by a subdivision of China Cinda Asset Management, a state-owned asset manager, has led to a hearing scheduled for March 19, as per the Hong Kong judiciary's website.

The turmoil at Sunac is not an isolated incident; numerous mainland developers, including the well-known China Evergrande (HKG: 3333) and Country Garden (HKG: 2007), have faced similar liquidation scenarios since the onset of a liquidity crisis in 2021 that shook the real estate market. However, it’s noteworthy that most of these petitions were not filed by state-owned entities, making China Cinda's action particularly significant in the current climate of governmental efforts aimed at stabilizing the beleaguered property sector.

On Friday, shares of Sunac China experienced a staggering drop, plummeting by as much as 29.7% to HK$1.23 during morning trading, marking its largest single-day decline since early October. The stock managed to stage a partial recovery, settling 21% lower by midday. Concurrently, its bonds were struggling as well, with a September 2025 bond trading at just 10.253 cents on the dollar, down from 12.875 cents the previous day, and a September 2032 bond valued at 7.85 cents, decreasing from 10.75 cents.

In a filing, Sunac acknowledged the petition and the upcoming hearing but did not divulge further specifics. This development plays into a larger narrative of weak home sales across China, raising fears that the sector may endure another round of offshore debt restructuring. Once a top developer in sales prior to the debt crisis of 2021, Sunac had successfully navigated a comprehensive overhaul of its $9 billion offshore debt in November 2023 after previously facing a liquidation threat in 2022, which was later retracted.

The company’s recent communications with creditors indicated a potential inability to meet upcoming September maturity deadlines for its restructured bonds due to uncertainties surrounding the industry's recovery in sales, casting doubt on its repayment capabilities. Alvin Cheung, an associate director at Prudential (LON: PRU) Brokerage Ltd, remarked on the situation succinctly: “I’m not surprised by the petition. Chinese developers are not making much money, while they have to keep repaying a lot of debt.”

As of the end of June, Sunac reported total borrowings of 277.4 billion yuan (approximately $37.83 billion) and is currently engaged in the restructuring of an additional 2.1 billion yuan worth of bonds. The broader property sector also felt the heat as stocks such as Shimao Group and Agile Group fell more than 9%, while CIFI Holdings dropped 8%. Despite the Chinese government rolling out several initiatives over the past year aimed at reviving the critical property sector, investor confidence seems to remain low.

For example, Country Garden, which defaulted on around $16.4 billion in offshore debt, revealed plans to propose a restructuring plan to its creditors aimed at reducing its debt by 70%. This plan could offer various options, including steep cuts to bond values or delaying maturity on new debt instruments.