The mainland media recently published an article disclosing that Fancy Year Holdings Group’s nearly RMB 30 billion in funds may be frozen, with the financial crisis far exceeding outside expectations. The picture shows four Shenzhen properties of Fancy Year Holdings, which was listed in Hong Kong on Jan. 15, 2015, being locked up, and the Fancy Year Hong Kong office building is empty.
(Yu Gang/The Epoch Times) On Oct. 8, Fazhanian CEO Baby Zeng issued a “letter home” saying the company had been hit by a “black swan” incident.
The Chinese media disclosed in an article that nearly 30 billion yuan (about 4.6 billion U.S. dollars) of Fancy Year’s funds may have been frozen, and that Fancy Year was suspected of financial fraud, with the financial crisis far exceeding outside expectations.
Zeng Bao also said in the “letter” that “Fancy Year will never lie flat”, which is the attitude of her and the company management.
Just four days before the release of Zeng’s “letter,” Fancy Year Holdings announced on October 4 that the company’s $206 million bond was overdue.
In an Oct. 11 article published by the Communist Party’s mouthpiece People’s Daily Online, it was said that Fancy Year’s default began five years ago with a bond.
According to the article, in 2016, Fayin issued a $500 million aggregate principal amount of senior notes with a five-year maturity in 2021 and an interest rate of 7.375 percent. Fancy had repeatedly offered the bond in May, June and July of this year “to purchase the outstanding principal amount of the 2021 notes with a cash tender offer.” After the completion of the tender offer and the cancellation of the repurchase of the notes, the total outstanding principal amount of the 2021 notes still amounted to $206 million.
Now, the debt has reached its final repayment deadline, and Fancy Year has not escaped the bad luck of bursting into flames.
The article also said that, according to International Finance News, Fancy Year Holdings has a total of 11 US dollar-denominated bonds in existence, with a debt balance of US$3.069 billion, of which five are due in about a year, totaling US$1.347.5 billion, facing greater short-term concentrated payment pressure.
Patterico’s 30 billion yuan funds are suspected to be frozen
On Oct. 9, several major Chinese portals reprinted an article titled “Behind Fancy Year’s lightning burst, the unavailable 30 billion”. According to the article, the downgrading of ratings by rating agencies will indeed have a negative impact on the company, “but this is obviously not the root cause of its overdue debts”.
According to the company’s interim report, Fancy Year had RMB 27.18 billion (about $4.2 billion) in bank balances and cash (unrestricted) at the end of June 2021, the article said. Meanwhile, at the end of September, Fazenian transferred Neighborhood Life, the core asset of its property company Choi Life, to Chinese property management company Beyoncé Services for 3.3 billion yuan (about $500 million).
The article questioned, “With 30 billion yuan of capital in hand, why can’t Fancy Life even pay off a ‘mere’ $200 million (about RMB 1.33 billion) in debt?”
The article analyzes that, for one, Fancy Year’s book is limited. Although Fayin’s interim report shows that it still had 27.18 billion yuan (about $4.2 billion) in bank balances and unrestricted cash as of the end of June, “the real estate company’s monetary funds are partly prepayments from purchasers of term properties, and partly frozen by regulatory banks and cannot be used by the real estate company to make payments.”
The article also cites Evergrande Group, a leading Chinese real estate company, as an example, saying that of the more than 160 billion yuan of monetary funds (about $24.8 billion) disclosed in Evergrande’s interim report, tens of billions of restricted funds are available.
Second, the hidden off-balance sheet liabilities will increase the corporate liquidity crisis. According to the article, some industry insiders said that although the net debt ratio of Evergrande is lower than the “three red lines”, a large amount of its debts are actually off-balance sheet, and the minority interests in net assets account for too large a proportion, and how much of the minority interests are in explicit shares and actual debts is still a black hole.
The so-called “three red lines” mainly involve three indicators, including a gearing ratio greater than 70% after excluding pre-receipts, a net debt ratio greater than 100%, and a cash to short term debt ratio less than one time. According to the number of stepping lines, the Chinese Communist Party regulators divided real estate enterprises into four grades, and for each grade lowered, the upper limit of interest-bearing debt growth rate increased by 5%, even for real estate enterprises in the green grade position, the annual increase of interest-bearing debt shall not exceed 15%.
The article also said that a report by Fitch, an international rating agency, also concluded that Fancy Year’s implied cash return was low. The so-called implied cash return is the change of “revenue + contractual liabilities”. Fitch believes that the high number of off-balance sheet items means that the performance of such items is not fully reflected in the company’s financials.
The article concludes that, in light of the above, it appears that although Fancy Year may be rich, it may not have much cash to draw on. Patterns has repeatedly bought back bonds just to reassure investors in order to buy time in exchange for freeing up space for financing.
Where did the money from the sale of assets to Beyoncé go?
The article also questions why Fazenia did not use the more than $3 billion from the sale of Neighborhood Play to return the U.S. dollar bonds that matured on Oct. 4.
The article says the most likely answer is that the deal was not originally intended to fill the current dollar debt, but to return it to other creditors, “combined with reports that Color Life’s equity has been pledged out, so the funds from the deal are likely to be used to return all the previously pledged loans.
The article said that according to public information, for the sale, Beyoncé Services paid for the transfer in three installments, including 2.3 billion yuan (about $300 million) in the first installment, 700 million yuan (about $100 million) in the second, and 300 million yuan (about $47 million) in the third. Patterns ended up with only $700 million in secured financing.
According to the article, the extent of financial strain can be seen through the sale of some of Fazenian’s property assets. Property management, as an asset of a real estate company with good quality and development prospects, is relatively easy to sell and can be sold at a good price. Therefore, “if not forced, the sale of property management companies will not become the final choice of real estate enterprises.
Patterico’s financial crisis far exceeds outside expectations
On October 10, Chinese portal NetEase reprinted an article by WeChat public number “General Arrow”, “Fancy Year without China: a debt default worse than Evergrande?”
According to the article, a closer look at Fancy Year’s interim report shows that the company’s debt situation from January to June 2021 is simply precarious.
First, Patterico’s debt structure is shifting from bonds to borrowings. Fancy Year’s borrowing balance increased by a net 5.654 billion yuan ($870 million) in the first half of the year, with a net increase of 4.788 billion yuan ($740 million) in borrowings due within one year.
Second, Fancy Year’s stock of U.S. dollar-denominated debt is large and the issuance cost is high. Fancy Year has 11 existing stock of USD bonds totaling USD 3.069 billion, accounting for 58% of the existing debt balance, and most of the issued USD bonds have a cost of 10% or more.
In addition, Fancy’s short-term debt service pressure is high. Based on June 2021, the size of debt maturing within one year is 19.464 billion yuan (about $3 billion), accounting for 35.81% of the entire stock of debt.
According to the article, Fancy Year’s financial problems are reflected in two aspects: on the one hand, there is a suspicion of financial report whitewashing. Although there is nearly $30 billion (about $4.6 billion) in cash on paper in Fancy’s interim report, this only reflects the position as of the June 30 reporting date and does not indicate the actual cash flow in September. “What’s even scarier is that, judging from Fancy’s near-depleted cash flow, the cash in the interim report, most likely cobbled together from prior operations and quickly pulled out after the fact, is just a spin on the books.”
On the other hand there may have been huge amounts of explicit shares and real debt. The article says that since 2016, Fancy has sold subsidiaries or associates every year for proceeds in the hundreds of millions of dollars. In particular, in December 2020, Fancy Year agreed with Zhongrong International Trust to acquire 70% of its subsidiary Shenzhen Jindi Ying Investment Co. for 800 million yuan (about $120 million). However, due to the unreasonable price and the nature of Zhongrong International Trust’s financial counterparty, the project was questioned as an explicit shareholding.
The article also said that, in addition, the issue of off-balance-sheet liabilities is involved in Hua Yan’s ongoing projects. Since September this year, the three major international rating agencies have downgraded Fancy Year four times, or lowered its outlook to “negative,” reflecting the concerns of professional agencies about the company’s true financial situation.
“All in all, Fancy Year’s financial crisis is far more serious than one would expect.” The article said.
Started in 1998 and headquartered in Shenzhen, Guangdong Province, China, Fancy Year Group was listed on the main board of the Hong Kong Stock Exchange in November 2009. Fancy Year was founded by Zeng Qinghong’s niece, Zeng Baobao, who has been the company’s executive director and majority shareholder. Zeng Qinghong is considered to be the number two figure in the faction of former Communist Party leader Jiang Zemin.
According to U.S.-based China expert and current affairs commentator Li Yanming, Zeng’s “family letter” was a clear provocation to Chinese President Xi Jinping and was quickly and forcefully countered by the Xi camp, who used economic and financial means to purge Fancy Year while launching a public opinion campaign against the Zeng Qinghong family. The situation is open for Xi and Zeng to fight.