China property woes deepen as Vanke seeks bond payment delay
Shenzhen Metro Group has extended about 30 billion yuan in loans to the cash-strapped builder, a crucial funding source that helped Vanke repay bonds this year
[BEIJING] China’s battered real estate sector suffered another blow after China Vanke proposed delaying repayment on a local bond, raising fresh concerns about Beijing’s willingness to support even the largest distressed developers.
Vanke is seeking to delay paying principal on a two billion yuan (S$366 million) note due on Dec 15, according to a filing to the Shanghai clearing house late Wednesday (Nov 26). The firm will arrange a meeting with bondholders on Dec 10 to discuss the proposal, the firm said.
The surprise move is another setback for the housing industry, which is still struggling to recover from years of sales declines and massive defaults by China Evergrande Group, Country Garden Holdings and others. Vanke had long been considered one of the healthier property firms.
“Everyone’s core fear is simple,” said Li Huan, co-founder of asset manager Forest Capital (Hong Kong). “If a flagship name like Vanke defaults or forces a big haircut, the contagion to the whole property sector and credit market will be massive.”
The suddenly mounting debt problems facing Vanke have become a key gauge of China’s stance on the real estate sector, which has been a drag on the economy for several years. Policymakers need to strike a delicate balance of trying to revive the moribund market without having to rescue individual firms.
Vanke’s bid to postpone repayment follows steep sell-offs of its bonds and stocks this week. Several local notes extended declines on Wednesday, triggering brief trading halts. Its US dollar bond due in 2027 fell to about 40 cents on the US dollar, signalling significant distress. The Hong Kong-listed shares plunged 6.3 per cent to HK$3.88, the lowest in more than a year.
“A default by Vanke would indicate that the government’s will to support the property sector is weakening” and would deepen the industry slump, said Leonard Law, a senior credit analyst at Lucror Analytics. “This would also make it harder for other property developers to issue bonds for refinancing.”
The developer’s two notes maturing next month had been indicated close to par, a sign that investors were betting the debt would be paid on time. In addition to the Dec 15 maturity, Vanke has a 3.7 billion yuan note due on Dec 28.
Vanke’s largest shareholder, Shenzhen Metro Group has extended about 30 billion yuan in loans to the cash-strapped builder, a crucial funding source that helped Vanke repay bonds this year. That lifeline was thrown into doubt after Shenzhen Metro signalled tighter borrowing terms for Vanke, one of China’s largest real estate companies.
SEE ALSO
“The extension is very surprising to the market,” said Yao Yu, founder of Shenzhen-based credit rating startup RatingDog, adding that support from Shenzhen Metro “has become suddenly meaningless.”
About 13.4 billion yuan of Vanke’s onshore bonds are due to mature or face redemption options by the end of June, according to Bloomberg calculations. That’s far more than the amount of untapped loans Vanke has available from Shenzhen Metro, based on their latest pact.
Vanke’s contracted sales for the first 10 months of the year were about 100 billion yuan, half the level of a year earlier. As at September, Vanke held about 60 billion yuan in cash, versus roughly 152 billion yuan in short-term debt, according to estimates from Bloomberg Intelligence analysts Daniel Fan and Hui Yen Tay.
The bond extension “could ease near-term maturity pressure, though around 13 billion yuan in bonds maturing by next June still face extension risk”, the BI analysts noted.
China has been considering new measures to turn around the housing market, such as subsidising interest costs on new mortgages, sources familiar with the matter said last week. Yet the effects of easing measures in September last year faded after a brief recovery.
“If Vanke’s bonds default at this time, it would undermine the effectiveness of government rescue policies,” said Li Gen, a founder of Beijing G Capital Private Fund Management Center, which focuses on China’s high-yield bond market. “It may accelerate the home price declines, and the creditworthiness of other state-owned developers would come under scrutiny.”
Global banks mostly have dim outlooks for China real estate, which has been experiencing a renewed sales slump since the second quarter. UBS Group expects home prices to fall for at least another two years. Fitch Ratings said last month that new home sales by area could decline 15-20 per cent from their current level before the sector stabilises.
As they try to cushion against the impact from debt problems, authorities are keeping a close eye on borrowers. Financial regulators are stepping up scrutiny of bond market violations, focusing on disclosure failures related to debt defaults, particularly in the real estate sector, according to a report in the official Shanghai Securities News. BLOOMBERG
Decoding Asia newsletter: your guide to navigating Asia in a new global order. Sign up here to get Decoding Asia newsletter. Delivered to your inbox. Free.
Share with us your feedback on BT's products and services
