In Chinese property, investment grade names suffer from high yield woes
Investment-grade Chinese property developers are not immune from the ongoing debt troubles of their high-yield peers as they face a liquidity crunch, falling stock prices and potential ratings downgrades.
On December 17, Fitch Ratings and Moody’s downgraded Shimao Group, a Chinese developer listed in Hong Kong. Moody’s lowered its rating from BB+, a notch below investment grade, further down to BB-, while Fitch downgraded Shimao by two notches from investment grade to the speculative rating of BB.
A month earlier, S&P Global Ratings had also cut Shimao’s rating from the investment grade of BBB- to the non-investment grade of BB+ on November 10.
“Shimao's credit profile is no longer consistent with investment-grade ratings due to questions around the strength of its liquidity position,” Fitch Ratings said in a commentary.
The group has CNY8.4 billion ($1.32 billion) in public capital market debt due in the first half of next year and another CNY11.8 billion due in the second half. Fitch expects Shimao to dip into its CNY53 billion worth of cash reserves to meet these maturities, and dispose of some assets to boost liquidity.
“However, failure to do so would rapidly eat into its liquidity buffers,” the ratings agency warned.
Shimao’s share price has also taken a hit, having fallen by 13.0% to HK$5.00 on December 20 from HK$5.75 on December 14.
“Investors’ dumping shares of Shimao Group is a clear sign of how heated the situation is. Shimao was downgraded to high yield by S&P so it was a borderline but also Vanke has found it hard to sell units,” Alicia Garcia-Herrero, Asia Pacific chief economist of Natixis, told AsianInvestor. China Vanke is an investment grade property developer listed in Hong Kong.
“Given the importance of pre-sales for the funding of the whole Chinese property industry (54% of total funding), there is no way even better credit developers cannot be affected,” she added.
HOME PRICE EFFECT
The core issue is a softening property market in mainland China that threatens the entire property sector.
“The reality is that it is a systemic problem because real estate developers cannot withstand the very rapid reduction in home prices,” Garcia-Herrero said.
The average price of new homes across 70 Chinese cities fell 0.25% in October from a month earlier - the biggest monthly drop since 2015, according to the National Bureau of Statistics. Prices stabilised in November, as new residential and commercial property prices in China’s first-tier cities were maintained from October.
China’s soft property market is why the People’s Bank of China (PBOC) had no choice but to make more liquidity available through more cuts in the Reserve Requirement Ratio (RRR) and also lower the down payment requirement as well as other restrictions on the macroprudential side, Garcia-Herrero explained.
On December 15, the PBOC resolved to cut the RRR for the second time this year to boost economic growth including the country’s flagging property market.
As a sign that China’s economy is not out of the woods, the central bank is continuing its stimulative measures. On December 20, the PBOC cut the one-year loan prime rate (LPR) to 3.8% from 3.85%, in the first reduction of the benchmark loan rate in nearly two years.
“Funding access will remain tight during the next 6-12 months due to tightened regulations, and increased risk aversion stemming from China Evergrande’s financial distress and defaults by several other property developers,” said a Moody’s report on December 1.
However, funding access for China’s property sector may improve if the Chinese government loosens regulations, Moody’s report qualified.
Nationwide contracted sales will decrease by five to 10% in 2022, a downward revision from Moody’s previous expectation of a zero to 5% decrease, the report added.
MORE DOWNGRADES AHEAD
Besides Shimao, more investment grade Chinese developers face the risk of being downgraded to non-investment grade. Fitch has placed 29 Chinese property developers Under Criteria Observation (UCO), indicating the companies’ ratings may change, the rating agency announced on October 20.
Not all developers with a UCO will have a rating change, explained the Fitch report. “Most negative rating actions are likely to be limited to one-notch downgrades or revisions to rating Outlooks. However, the severity of negative rating actions can be higher for some issuers if sector fundamentals remain weak or liquidity positions worsen.”
The 29 Chinese developers which may potentially be downgraded by Fitch include six investment grade developers, namely BCG Chinastar International Investment, Beijing Capital Group, Beijing Capital Development Holding (Group), China Jinmao Holdings Group, Longfor Group Holdings and Sino-Ocean Group Holding.
“Industry conditions and the funding environment have weakened since... early August following the distress of China Evergrande Group,” the Fitch report said.
The share prices of Jinmao and Longfor, both listed in Hong Kong, have declined. From the beginning of this year till December 20, the share price of Jinmao has fallen by 33.9% to HK$2.36, while that of Longfor decreased by 16.1% to HK$37.15.
China’s property woes came into the global spotlight after two high profile defaults. On December 20, Kaisa announced it defaulted on three sets of US dollar notes totalling $488.38 million and failed to pay interest on $17.48 million of US dollar senior notes due December 1 for which it has a grace period of 30 days.
S&P declared Evergrande, the world’s most indebted property developer, in default on December 17. On December 9, Fitch downgraded Evergrande to “Restricted Default”.