Jiayuan International on Thursday announced a tentative plan to sell its stake in subsidiary Jiayuan Services to rival Jinke Smart Services, as China’s debt-saddled developers seek to unlock value from their relatively healthy property management units.
Under the non-binding framework agreement, Jiayuan International would sell 450 million ordinary shares in Jiayuan Services to Jinke Smart Services, thus exiting its 73.56 percent interest in the company, the developer said in a filing with the Hong Kong stock exchange.
“Save as disclosed above, as at the date of this announcement, no definitive agreement or arrangement in respect of the potential disposal has been entered into, and details and terms of the potential disposal are yet to be finalised,” Jiayuan International chairman Shum Tin Ching said in the filing. “Therefore, the potential disposal may or may not proceed.”
The statement confirmed earlier reports that a deal was in the works. Trading in Jiayuan International’s and Jiayuan Services’ Hong Kong-listed shares was halted on Wednesday of last week after they plunged on Shum’s disclosure that his Mingyuan Group Investment had pledged more than a billion shares in the two firms to a finance affiliate of developer Sun Hung Kai. Both stocks resumed trading in this Friday’s session.
The move to sell out of its stake in the property management unit comes as Jiayuan International tries to boost liquidity and make good on several sets of offshore bonds coming due over the next 12 months.
The company announced Thursday in a separate filing that it had repaid interest of more than $12 million on a $176 million bond maturing in February 2023. It also said it was “arranging for the remittance of the necessary funds” to make a $12 million interest payment on a $200 million bond due in October of this year after missing the payment on 30 April and triggering a 30-day grace period.
Fitch Ratings last week downgraded its long-term issuer default rating on Jiayuan International to C from B, citing the missed payment in April. The agency said that while Jiayuan’s available cash might cover the October 2022 bond, it would be insufficient to pay the February 2023 bond and an additional $295 million bond due in April 2023.
“The recent drop in the company’s share and bond prices may also dampen confidence of homebuyers and investors, leaving more uncertainties over refinancing and property sales,” Fitch said.
Meanwhile, Jinke Property Group, which holds a roughly 30 percent stake in Jinke Smart Services, is facing a debt crunch of its own. The Chongqing-based developer asked for an extension this week on a RMB 1.25 billion ($188 million) onshore bond after investors exercised a put option requiring repayment of the debt by 28 May.
In a research note this week, S&P Global Ratings predicted that healthy firms would take advantage of the downcycle in China’s real estate market to buy the property management subsidiaries of distressed developers.
“To bolster liquidity, some Chinese developers, particularly the ones in distress, may be tempted to unduly extract cash flows from their healthy property management subsidiaries,” said analyst Jay Lau. “This would prop up their finances at the expense of the property managers.”
S&P Global Ratings noted that in recent months, Country Garden Services acquired R&F Property Services and Zhongliang’s Everjoy Services, while China Resources Mixc Lifestyle Services bought Jiangsu Zhongnan Property Services.
“We view some developers’ increased investment in, or expansion into, property management as presenting governance risk,” the agency said. “This is typically true for distressed developers that may be tempted to tap the strong, steady cash flows of the management arm.”