China Vanke Gets S&P Downgrade, Faces Rejig Amid Debt Crisis

Troubled property developer Vanke suffered another blow on Friday when ratings agency S&P Global cut its rating.

The agency said Vanke’s financial commitments were unsustainable because of its weak liquidity levels.

Then the news came Vanke bonds and stocks hit record lows this weekwhose decline was initially triggered by media reports that it might face a debt restructuring. The government-backed company then announced on Wednesday that it would seek to defer onshore bond repayments for the first time.

See also: China’s Baidu lays off staff after third-quarter loss: Sources

A bondholder meeting is scheduled for December 10.

The debt woes of Vanke, one of China’s best-known developers with numerous projects in major cities, have reignited concerns that the country’s real estate sector could slip back into crisis.

The industry once accounted for a quarter of GDP but has been hit by a liquidity crunch in 2021 after regulations tightened and dozens of developers defaulted on debt.

Former industry giants among those hardest hit China Evergrande With a debt burden of US$300 billion, it was ordered to liquidate by the court and was disgracefully delisted this year.

Beijing orders reorganization

Standard & Poor’s said in a new report that Vanke’s long-term issuer credit rating has now been downgraded to CCC- from CCC and has placed the company on credit watch with a negative impact.

“We believe the company’s debt is currently vulnerable to nonpayment or adverse restructuring risks,” the report said.

S&P said Vanke faced a bond maturity wall of 11.4 billion yuan ($1.6 billion) between now and May next year and forecast negative operating cash flow during that period.

Vanke is about 30% owned by Shenzhen Metro, and state support is seen as enough to prevent the company from falling into serious financial trouble.

But on Tuesday, financial news outlet Octus reported that Beijing had issued preliminary guidance to the Shenzhen municipal government, where Vanke is located, to consider using a “market-oriented approach” to deal with the developer’s debt.

The Octus report said the phrase was a euphemism for restructuring.

Analysts pointed out that the central government’s main concern is ensuring that the houses that have been ordered and paid for are actually completed.

Robert Ciemniak, CEO of Real Estate Foresight, writing in SmartKarma, said: “The policy signals have been consistent about pushing for the delivery of pre-sale homes, and they have implemented that rather than support the developers themselves.”

Bonds and stocks plummet

Losses in Vanke’s bonds and stocks accelerated after the company said it was seeking approval from bondholders to postpone repayment of a 2 billion yuan ($280 million) onshore bond due on Dec. 15.

One of the bonds hitting record lows on Friday was one due in March 2027, which plunged 22.5% to $31 per $100 of face value. The stock was trading at $85 on Monday.

Trading of this bond and three other Vanke RMB bonds that fell more than 20% were suspended.

Vanke’s Shenzhen-listed shares fell 1.6%. Its Hong Kong-listed shares rose 0.8% after hitting a record low the previous day.

It remains to be seen how much of an impact Vanke’s woes will have on the industry as a whole. But the industry is still struggling. Prices for new homes in China fell at their fastest monthly rate in a year in October, underscoring continued weakness in demand.

Vanke’s interest-bearing liabilities totaled 364.3 billion yuan, and in late October it announced a third-quarter net loss of 16.1 billion yuan.

• Reuters Additional input and editing by Jim Pollard

See also:

Hong Kong fire adds insult to injury to China’s real estate industry

Death toll rises in Hong Kong’s deadly fires, but hundreds still missing

Liquidator sells US$255 million in China Evergrande assets, company to delist

China lost US$7.6 billion due to floods in the first half of the year

Vanke shares fall on news of CEO arrest and state takeover

China Country Garden plans to restructure US$10.3 billion in overseas debt

Chinese local governments have been slow to respond to the real estate crisis

Chinese clients abandon PwC after China Evergrande fiasco

China’s real estate debt has weighed on the economy for years

Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd newspapers in Sydney, Perth, London and Melbourne before traveling to South East Asia in the late 1990s. He served as a senior editor at The Nation for more than 17 years.