Fitch Ratings on the liquidity of Chinese real estate developers, debt crisis
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Residential sales fell along with home buyer confidence. Home sales by value fell 16.31% from a year ago in November, a fifth month of decline. New home prices fell 0.3% from the previous month, the biggest drop since February 2015, according to Reuters.
Fitch said in his report that in a severe scenario where residential home sales fall by 30%, 12 or about a third of his 40 assessed developers could have negative cash flow. In Fitch’s base scenario – a less severe scenario – a 15% drop in home sales could result in a cash shortfall of around 13% of its rated developers.
Chinese developers face $ 19.8 billion in U.S. dollar-denominated offshore bonds in the first quarter and $ 18.5 billion in the second, Nomura analysts estimated in a recent note. That first-quarter amount is almost double the $ 10.2 billion in fourth-quarter maturities, analysts said.
Next year, real estate developers are expected to face an even higher number of bond maturities.
Developers rated “B” or lower, in particular, will face increasing pressure to repay offshore debt, with offshore bonds maturing or putable in 2022 having higher principal amounts due than in 2021, Fitch said. . Convertible bonds allow their holders to force the issuer to redeem the bond before maturity.
A “B” rating means that there is a significant risk of default, but a limited margin of safety remains.
Hidden debt increases pressure on liquidity
As the debt crisis unfolded, doubts also arose over the lack of transparency on the real extent of developers’ responsibilities.
“Some struggling credits in recent months have also cast doubt on the transparency of corporate disclosures and contingent liabilities,” Fitch said.
One example was Fantasia, which had an undisclosed private obligation in the company’s financial reports that Fitch highlighted in October.
“The emergence of ‘hidden private debt’ is exacerbating liquidity pressures, especially for lower-rated developers with large bond maturities ahead,” Fitch said in the report last week.
Such hidden debt would include undisclosed debts and guarantees for loans from joint ventures, associates and other third parties that allow developers to bypass China’s “three red lines” debt limits, according to Fitch.
This policy limits leverage to a company’s cash flow, assets, and capital levels, and aims to dampen developers after years of growth fueled by excessive leverage.
Looking ahead, analysts don’t expect market conditions troubling developers to ease until next year.
Guangzhou Evergrande football stadium under construction in Guangzhou, China’s Guangdong Province, September 17, 2021
STR | AFP | Getty Images
Monica Hsiao, founder and chief investment officer at Triada Capital, said she expects a “boost” for Chinese high yield bonds, primarily real estate bonds, in the first half of next year.
“Because the market is really waiting to see if the government’s pain threshold for deeper policy easing is reached, and a lot of the market thinks it will be in the first quarter,” she told Street CNBC’s Signs Asia ”Friday.
Earlier this month, investor confidence in the real estate sector strengthened as China’s monetary policy moves towards easing. The central bank reduced the reserve requirement ratio, or the amount of liquidity banks must hold as reserves, for the second time this year – freeing up 1.2 trillion yuan ($ 282 billion) to stimulate the economy.
Fitch added that the operating environment for Chinese developers will remain difficult and that a “significant recovery in financing and market access conditions” will only occur in the second half of 2022.
– CNBC’s Evelyn Cheng contributed to this report.