S&P downgrades China Vanke, says its financial commitments unsustainable

[SHANGHAI/HONG KONG] Ratings agency S&P Global downgraded China Vanke on Friday (Nov 28), saying the troubled property developer’s financial commitments are unsustainable due to its weak liquidity levels.

The action came after Vanke bonds and stocks tumbled to record lows this week, with declines initially sparked by a media report that it might face a debt restructuring. The state-backed firm then announced on Wednesday it was seeking to delay an onshore bond repayment for the first time.

A bondholder meeting is due to be held on Dec 10.

Debt woes at Vanke, one of China’s most high-profile developers with many projects in major cities, have revived concerns that the country’s real estate sector could fall back into crisis.

The industry, which once accounted for as much as a quarter of GDP, was hit by a liquidity crunch in 2021 after regulations were tightened and dozens of developers have since defaulted on debt. Among those hardest hit, former industry titan China Evergrande was ordered by a court to liquidate and was ignominiously delisted this year.

In a new report, S&P said Vanke’s long-term issuer credit rating was now CCC-, down from CCC, and it placed the company on CreditWatch with negative implications.

“The company’s debt obligations are currently vulnerable to risks of nonpayment or distressed restructuring, in our opinion,” the report said.

S&P said Vanke faced a “bond maturity wall” of US$1.6 billion between now and May next year, and forecast Vanke would have negative operating cash flow during that time.

Vanke is about 30 per cent owned by Shenzhen Metro, and that state backing had been considered enough to stop the company from sliding into severe financial trouble.

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But on Tuesday, financial news outlet Octus reported that Beijing had given preliminary guidance to the government of Shenzhen, where Vanke is based, to consider a “market-oriented approach” for dealing with the developer’s debt.

The phrase is a euphemism for restructuring, the Octus report said.

Analysts noted the central government’s primary concern was more to do with ensuring that homes that had been ordered up and paid for were actually completed.

“Policy signalling has been consistent about the push for the delivery of pre-sold homes, and they have executed on that, not the support for developers per se,” said Robert Ciemniak, CEO at Real Estate Foresight, who publishes on SmartKarma.

The slide in Vanke’s bonds and stocks accelerated after the company said it was seeking bondholder approval to delay the repayment of a US$280 million onshore bond due on Dec 15.

Among its bonds hitting record lows on Friday was one due in March 2027 which plunged 22.5 per cent to 31 per 100 par value. It had traded at 85 on Monday.

It and three other Vanke yuan bonds that dropped 20 per cent or more were suspended from trade.

Vanke’s Shenzhen-listed shares were down 1.6 per cent. Its Hong Kong-listed stock was up 0.8 per cent after hitting a record low a day earlier.

Just how much effect Vanke’s woes spill over to the rest of the sector remains to be seen. But the industry continues to struggle. China’s new home prices fell at the fastest monthly pace in a year in October, highlighting persistently weak demand.

Vanke has a total of 364.3 billion yuan (S$66.7 billion) in interest-bearing liabilities, and in late October it reported a third-quarter net loss of 16.1 billion yuan. REUTERS