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Chinese property developers’ ability to repay debt hits decade low By Reuters


© Reuters. FILE PHOTO – An excavator can be seen on a site for new residences in Shanghai (China) in this file photo from March 21, 2016. REUTERS/Aly SONG/File photo

Gaurav Dogra, Patturaja Murugaboopathy

(Reuters) – Chinese property companies were struggling to pay interest on debt even before China Evergrande Group’s financial crisis.

The aggregate interest coverage ratio among 21 major Hong Kong-listed Chinese developers of real estate fell to 0.94 by June. It was the lowest level in more than a decade according to Reuters calculations based upon Refinitiv data. This is the ratio of an organization’s interest expense to earnings before tax. It was 1.47 last year.

Graphic: Hong Kong listed Chinese property developers’ interest cover ratio https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwkzljpo/Hong%20Kong%20listed%20Chinese%20property%20developers’%20interest%20cover%20ratio.jpg

Evergrande, once China’s most prominent property developer missed the second offshore interest payment. Evergrande, which was once China’s biggest property developer, has fallen prey to a staggering $305 billion debt load and is now in need of a major restructuring.

“Rattled investor confidence from China Evergrande Group’s recent troubles and likely default could spell a potential funding crunch for the Chinese property sector and speculative-grade issuers,” S&P Global (NYSE:) said in a report.

China was pushing property companies to reduce excessive borrowing and land purchases. The crackdown on them hit hard, restricting their ability to refinance maturing debt.

Sunshine 100 China Holdings (China Oceanwide Holdings) and China Fortune Land Development all defaulted in this year’s payments.

China is a country that has a lot of potential for bankruptcy.

Bailard’s chief investment officer Eric Leve stated that allowing an effective default is a statement by the government that it wants to end the bubble in housing and would be open to letting other builders default.

After regulators imposed limits on the ratios of debt, real estate companies in the country tried to speed up efforts to reduce debt. These 21 companies’ median debt-to equity ratio fell to 1.8 in June, which is the lowest level since 2017, compared with 1.9 in December.

Their net debt to EBITDA was 4.9, down from 5.2 in the last year. This score is considered high risk by experts and suggests that it will take time for the debt to be paid off.

Graphic: Hong Kong listed Chinese property developers’ net debt to EBITDA https://fingfx.thomsonreuters.com/gfx/mkt/znpnebabyvl/Hong%20Kong%20listed%20Chinese%20property%20developers’%20net%20debt%20to%20EBITDA.jpg

Graphic: Hong Kong listed Chinese property developers’ debt to equity ratio https://fingfx.thomsonreuters.com/gfx/mkt/jnvweydwevw/Hong%20Kong%20listed%20Chinese%20property%20developers’%20debt%20to%20equity%20ratio.jpg

“Currently, under the ‘Three Red Lines,’, Guangzhou R&F and Evergrande are among our tracked developers that are categorised beyond the ‘yellow’ group, indicating weaker-than- peers’ financial positions,” said Cynthia Chan, analyst at Daiwa Capital Markets.

“In terms of cash-to-short-term debt ratios, besides Evergrande and Guangzhou R&F, which have very low ratios of below 1x, Gemdale, Agile and China SCE also have relatively low cash-to-short-term debt ratios of 1.2x or below.”

Guangzhou R&F Properties Co 2777.HK was raising as much as $2.5 billion by borrowing from major shareholders and selling a subsidiary, according to exchange filings last month, highlighting the scramble for cash as signs of distress spread in China’s property sector.

Graphic: Hong Kong listed Chinese property developers’ cash to short term debt https://fingfx.thomsonreuters.com/gfx/mkt/byvrjlwrkve/Hong%20Kong%20listed%20Chinese%20property%20developers’%20cash%20to%20short%20term%20debt.jpg



Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.