Fitch Ratings on liquidity of China real estate developers, debt crisis
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Residential sales plummeted alongside home buyer confidence. In November 2015, home sales fell 16.31% compared to last year. This is the fifth month of falls. According to Reuters, this is the biggest decline in home values since February 2015.
Fitch stated in its report, that in the event of a 30% drop in residential home sales, twelve or about a third its 40-rated developers might experience negative cash flows. In Fitch’s base case — a less severe scenario — a 15% fall in home sales could result in about 13% of its rated developers suffering a cash deficit.
Nomura analysts recently estimated that Chinese developers could face $19.8 billion of maturing offshore U.S. dollars denominated bonds and $18.5 billion for the second. The analysts estimated that this first-quarter figure is almost double the $10.2 million in maturities from the fourth quarter.
Real estate developers will face higher bond maturities in the coming year.
Fitch stated that developers rated B or lower will be under increasing pressure to pay off offshore debt. For example, maturing bonds or putable bonds offshore in 2022 could have higher principal payments than those in 2021. The holders of putable bonds can force the issuers to redeem their bond prior to maturity.
The rating of “B” means that there are substantial default risks, with a narrow margin of safety.
Hidden debt worsens liquidity strain
As the crisis in debt developed, there was also doubt about the transparency of the developer’s liabilities.
Fitch stated that “some distressed credit over the last few months have also cast doubt on the transparency of companies’ disclosures and contingent liabilities.”
Fantasia is one such example. Fantasia held a private bond that was not revealed in its financial reports. Fitch highlighted in October.
Fitch stated in a report that “hidden private debt” is causing liquidity problems, especially for developers who have lower ratings and large bond maturities.
Fitch identifies hidden debt as debt that is not disclosed and guarantees of borrowings from joint ventures, associates or other third parties. This allows developers to circumvent China’s “three redlines” debt limit.
The policy sets a ceiling on the company’s debt relative to cash flows, assets, capital, and it is designed to restrain developers from letting go of years of excess debt-fueled growth.
The troubles of developers could soon end
The market conditions currently affecting developers are expected to continue into next year, according to analysts.
Guangzhou Evergrande Soccer Stadium is under construction in Guangzhou (China’s Guangdong Province) on Sep. 17, 2020
STR | AFP | Getty Images
Triada Capital founder Monica Hsiao said that the chief investment officer and principal investor at Triada Capital expects to see a bottoming in China’s high-yield, or real estate, bonds.
She said that the market was still waiting to find out if the government has reached its pain threshold to allow for further material policy easing. “Street Signs Asia’s CNBC correspondent on Friday explained.
As China began to ease its monetary policy, investors felt more positive about the sector’s property market. The central bank cut the reserve requirement ratio, or the amount of cash that banks must hold as reserves, for the second time this year – freeing up 1.2 trillion yuan ($282 billion) to boost the economy.
Fitch stated that China’s developers face a difficult operating environment and that there won’t be a significant recovery in funding or market access conditions until 2022.
— CNBC’s Evelyn Cheng contributed to this report.
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