China Vanke faces reality check as bond extension talks drag on

EVEN more evidence is piling up that China Vanke can no longer rely on state support, underscoring a dramatic reversal for the developer whose local government backing had until recently made the risk of default seem distant.

Vanke found itself on Monday (Dec 15) having to offer better terms for its request to delay paying a local bond to creditors including the very state-owned banks that many investors had long assumed would help keep it afloat.

The last major developer to so far have avoided debt failure amid China’s unprecedented property crisis, Vanke vowed to pay interest by the end of a grace period next Monday on the two billion yuan (S$366 million) note that matured on Dec 15, sources familiar with the matter said. It had earlier said it would do so only after a year. The builder also vowed to add unspecified credit enhancements.

Creditors had just days earlier rejected the company’s initial extension plan. The crisis has left Vanke at risk of a default that could trigger ripple effects across its US$50 billion of interest-bearing liabilities. It also threatens to plunge it into what would be one of China’s biggest-ever restructurings before the firm has even announced any plan to manage such a complex process.

“The improved terms proposed yesterday suggest that the company is still not ready with a comprehensive restructuring plan and is essentially trying to buy more time,” said Li Huan, co-founder of Forest Capital Hong Kong. “Unless there is meaningful credit enhancement on offer, bondholders may not be willing to agree to an extension.”

Investors have for weeks now been ditching perceptions they previously held that Vanke, once the nation’s largest property developer, would be “too-big-to-fail”. The company’s biggest shareholder, government-backed Shenzhen Metro Group, had previously provided over 30 billion yuan in loans, but more recently signalled plans to tighten borrowing terms. That shift sent many of Vanke’s bonds from near par to deeply distressed levels of around 20 per cent of face value within weeks.

The builder will hold a bondholder meeting on Thursday to discuss the revised proposal. The firm would need support from investors holding more than 90 per cent of the security’s outstanding principal amount to pass the plan. Creditors will have until 10 am Dec 22 local time to decide whether they are satisfied with the latest proposal.

None of the more than a dozen creditors holding the distressed developer’s note voted in favour of Vanke’s initial extension proposal before the Dec 15 maturity.

Vanke is now also seeking to extend a five-business-day grace period on the local note to 30 trading days, in a bid to buy more time for negotiations, the sources familiar with the matter said. If the initial grace period passes with no payment and no other agreement, holders could call default – once an unthinkable outcome.

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The property giant’s woes highlight broader challenges in China as the real estate crisis enters its fifth year. Financial institutions, including banks, have in general become less patient with struggling developers. New-home prices in 70 cities dropped 0.39 per cent in November from the previous month, when they declined the most in a year.

Vanke’s current struggles stand in contrast to earlier this year, when officials from its home base of Shenzhen-the southern city bordering Hong Kong-intervened to shore up its finances.

This time around, however, local authorities have only asked bondholders to understand Vanke’s financial stress. BLOOMBERG