China Vanke faces next test as debt default pressure builds

CHINA Vanke is bracing for its next major test as the developer that’s become a symbol of the nation’s broader property crisis navigates a proposal to delay bond payments and drafts broader restructuring plans.

Once China’s biggest builder, the Shenzhen-based firm must pitch revised extension proposals by the end of Monday (Jan 12) to creditors holding two local notes totalling 5.7 billion yuan (S$1.1 billion) that initially matured in December, according to recent filings.

In prior votes, the holders rejected plans to delay payments for 12 months but agreed to extend the grace periods for several weeks. The company, under pressure from authorities, is also preparing a broader restructuring plan, which still needs Beijing’s approval, sources familiar with the matter said last week.

Vanke, the last major Chinese developer to stave off debt failure so far, is under mounting strain from nearly US$50 billion in interest-bearing liabilities. The company scrambled for cash to meet bond repayments in December after a key state-owned shareholder scaled back support, triggering a cascade of default tests.

The risk is that the developer fails to find a middle ground with bondholders or opts for a sweeping restructuring, both effectively leading to an eventual default and signalling a new front in a property crisis that’s triggered a US$130 billion in non-payments and a wave of liquidations.

“A debt restructuring is unavoidable for Vanke given its strained liquidity and lack of government support,” said Zerlina Zeng, head of Asia Strategy at Creditsights Singapore. “It came earlier than expected, and in our view is more ideal than extending the grace period multiple times, and delaying payments indefinitely.”

In its earlier proposals to creditors, Vanke offered to pay interest within the grace period and floated unspecified credit enhancements while seeking a 12-month deferral on principal repayments. Bondholders, however, pushed for more.

Investors have sought stronger credit enhancements, such as collateral tied to specific property projects, guarantees from major state-owned shareholder Shenzhen Metro Group or other Shenzhen-based state-owned enterprises.

Vanke appears unlikely to meet creditors’ demands. At a bondholder meeting last month, a company official said Shenzhen Metro had already extended more than 30 billion yuan in loans to the developer. The support was beyond its obligations, signalling that further backing was unlikely. A government-mandated restructuring plan would also be the clearest sign yet that Shenzhen Metro won’t bail out the firm.

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“Management at Vanke and Shenzhen Metro spent lots of time engaging with investors in hopes of winning extensions, but those efforts proved unsuccessful,” said Li Gen, founder of Beijing G Capital Private Fund Management Center. “It remains to be seen whether, and to what extent, the central government will step in to guide the company towards a more credible restructuring plan.”

The angst originally accelerated back in late November when Vanke’s decision to extend some bond payments rekindled sector concerns and sent some of its notes sliding to record lows. Some market watchers have warned that a full-scale debt restructuring is inevitable as extensions don’t address the underlying issues.

A default could also trigger cross-default classes across the company’s other debt obligations. Some of Vanke’s offshore bondholders have recently been approached by Houlihan Lokey and PJT Partners, which are seeking to advise them. Such steps are often a prelude to the formation of ad hoc committees to represent holders in restructuring talks. BLOOMBERG