Wednesday, June 17, 2015

Renhe Commercial Holding's Risky New Business

In our search for the company that will set off contagion in China’s capital markets, Renhe is a prime candidate. It could be another company that the Chinese financial authorities allow to go bankrupt for purely economic reasons. The timeframe for this to happen would be March 2016. According to the New York Times:
For Renhe, the business of converting bomb shelters into shopping malls has turned costly and unprofitable. The company has accumulated debt, reporting net losses and negative cash flow for the past several years. With only about 900 million renminbi, or about $150 million, in cash on hand, Renhe will have to find a way to repay or refinance a $1 billion bond it sold to international investors, which comes due for repayment in nine months.
Renhe is an example of a Chinese company that has borrowed from overseas markets, but is unable to cover debt payments because of purely economic reasons.  The most recent default in the offshore U.S. dollar debt market, Kaisa, is considered to be because of political or criminal reasons, not specifically economic reasons.  Renhe management is currently planning a new business strategy to leave the bomb-shelter-turned-shopping-mall business and improve its cash flow by purchasing a farmers’ market business. However, the details of the deal hint that it could be grounds for the authorities to consider Renhe’s future financial situation the result of improper transactions. According to the same New York Times article:
Renhe’s deal for eight farmers’ markets in six cities across China is meant to generate minimum annual profit from rents of 625 million Hong Kong dollars, or about $80 million. But it comes with a twist. Renhe is buying the markets from one of its directors, who is also the wife of the company’s chairman and controlling shareholder.
What could go wrong?