China Vanke wins nod from lenders to defer interest payments: sources

[BEIJING] China Vanke has struck a deal with domestic lenders to defer loan interest payments to September, two sources with knowledge of the matter said, as the state-backed developer scrambles to avoid a default in the crisis-hit property sector.

The lenders, including Bank of China, have agreed to allow cash-strapped Vanke to make annual interest payments instead of quarterly, and defer all such dues in the coming months to September, said the sources.

The new payment arrangement comes after the developer missed a quarterly loan interest payment due last month, the sources said. It was coordinated by the State-owned Assets Supervision and Administration Commission of Shenzhen Municipal People’s government (Shenzhen SASAC), one of the sources added.

Vanke, Bank of China, and the Shenzhen state asset regulator did not immediately respond to requests from Reuters for comment. The sources declined to be named due to the sensitivity of the matter.

The deferred interest payments win breathing room for Vanke, formerly China’s biggest developer by sales, as it negotiates repayments on a slew of debt instruments and faces a bond maturity bill of more than 13 billion yuan (S$2.4 billion) in the first half of this year.

Vanke’s agreement with the banks highlights efforts being made by the local government and the financial sector to prevent a default by Vanke and limit any knock-on effect on China’s property and banking sectors.

The developer is currently talking to holders of three onshore bonds to defer payments, amid concerns about the impact of another high-profile debt default on China’s property sector. The sector once accounted for a quarter of the world’s second-largest economy but has been in the grip of a liquidity crisis since 2021.

A growing list of developers, including industry leaders China Evergrande Group and Country Garden, have defaulted on their repayment obligations over the last four years, weighing on homebuyer sentiment and the broader economy.

Vanke shares listed in Shenzhen and Hong Kong both dropped 2 per cent on Wednesday (Jan 7), while its onshore bonds were broadly unchanged.

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Lenders’ exposure to Vanke

Vanke had 264 billion yuan of bank loans as of end-June, its latest financial report showed, with 166 billion yuan of them non-current loans that were payable after one year or more.

Bank loans, of which 62 per cent were secured with collateral, accounted for 72.5 per cent of its total debt at 364 billion yuan.

State-owned banks including Bank of China and Industrial and Commercial Bank of China (ICBC), as well as China Merchants Bank and Ping An Bank have a higher exposure to Vanke than other lenders, according to a JPMorgan research note published in November.

The note said Vanke’s total bank loans accounted for 1.9 per cent of all developer loans and 0.1 per cent of total bank loans in China. A default by Vanke might drag earnings growth recovery for the banks that had higher exposure, it added.

ICBC, China Merchants Bank and Ping An Bank did not immediately respond to requests for comment.

Repaying interest quarterly on bank loans is a common practice in China for mid-term loans, industry participants said, while interest for long-term credit is usually paid annually or semi-annually.

Vanke is one of the few high-profile distressed developers in China which have not defaulted on its debt. Its missed loan interest payment in December did not trigger a default after the renegotiated term, said one of the sources.

The developer surprised the market in November by seeking a public bond extension, despite getting a loan infusion worth 22 billion yuan from major shareholder Shenzhen Metro, a company owned by the Shenzhen government, last year. Since then, holders of notes that matured on Dec 15 and Dec 28 have approved Vanke’s proposal to extend the repayment grace period to 30 trading days from five, but rejected its plan to delay the repayment by one year.

The developer is holding a bondholder meeting next week to seek repayment and grace period extensions for a 1.1 billion yuan bond with put date on Jan 22.

Vanke will likely mirror the strategies of some other cash-strapped Chinese developers and seek multiple short-term extensions for its bond repayments before ultimately proposing a debt restructuring, credit analysts have said. REUTERS