Chinese property developers have been hit by a record number of international credit ratings agencies this year, as the Evergrande collapse stoked concerns about the health of the economy. China.
The downgrade comes after Beijing introduced measures last year to cool an overheated property market and a liquidity crisis that is threatening to spread to more reliable borrowers.
Moody’s, Fitch and S&P downgraded Chinese developers 43, 54 and 30 times in 2021, respectively, from 6, 12 and 11 in 2020, putting more pressure on the ability to refinance loans external debt during the housing downturn.
An analysis of Financial Times data on the biggest borrowers shows that while riskier developers have seen a significant drop in ratings over the past year, the ratings of investment-grade firms have barely changed. change. A credit rating of BBB or higher is investment grade, while those below are high yield.
Fueled by China’s rapid urbanization, the country’s property developers are major borrowers at home and abroad, and in Asia they make up a large portion of the region. . $400 billion high yield corporate bond market. They are in a state of tension after the government of Chinese President Xi Jinping moved to limit financial leverage due to fears of asset bubbles in the real estate sector.
Evergrande, the world’s most indebted developer with more than $300 billion in debt, began unraveling this summer as it struggled to generate enough cash to pay its debts and sustain the empire. Giant of real estate projects. It missed many international bond payments from the end of September and was finally declared insolvent by Fitch this month.
Liquidity problems at Evergrande, which was in restructuring talks, quickly spread to other developers. Kaisa, another major international borrower, defaulted on a $400 million bond this month. Other developers Fantasia and China Modern Land have also defaulted on their loans in recent months.
Kaisa this week said it was talk to bondholders about restructuring plan and it hired as an advisor to investment bank Houlihan Lokey, which also works for Evergrande.
S&P downgraded Evergrande’s bonds from B+ in January to CC in September, before they were removed at the company’s request last week.
In early December, Fitch downgraded Evergrande to “limited default” after showing no sign of paying for the bond coupons it owes investors after the end of the 30-day grace period. . Fitch noted that “the company did not respond to our request for confirmation of coupon payments”. Evergrande has yet to make any official disclosures about the payments.
Weakness across the developed world has set the tone for China’s economy, which has struggled to maintain momentum this year after recovering rapidly from the start of the pandemic at the start of the year. 2020. Land purchases have declined and new home prices have fallen month-on-month for the past three months.
Interest in the sector has also roiled Asia’s high-yield bond markets. Effective yields for China’s high-interest borrowers jumped in November to nearly 30%, the highest level since the global financial crisis. They are currently trading at 22%, according to the ICE index, in a sign that the market-wide panic has subsided.
However, a crisis is still likely for more reliable borrowers. Shimao, a developer that hasn’t been downgraded, was given a lower B+ rating by S&P this week for “weak access to capital”. The company’s bonds maturing next year fell to 59 cents against the dollar in December and are currently trading around 65 cents.
Analysts at Citi last week noted that the company is “trying to bolster confidence by slowing land bank acquisitions, ramping up collection, disposing of non-core assets, and raising capital through issuance of new shares”.
But it added that since developers have “moved from a growth model to a survival mode, Shimao’s contracted revenue and earnings are unavoidable”.
