In Chinese Real Estate, Investment Grade Names Suffer From High Yield Problems | Fund managers

Blue-chip Chinese real estate developers are not immune to the lingering debt problems of their high-yield counterparts as they face a cash crunch, falling stock prices and potential downgrades ratings.

On December 17, Fitch Ratings and Moody’s downgraded Shimao Group, a Chinese developer listed in Hong Kong. Moody’s downgraded its rating from BB +, one notch below the investment rating, to BB-, while Fitch downgraded Shimao two notches from the investment rating to the speculative rating of BB.

A month earlier, S&P Global Ratings also downgraded Shimao’s rating from the investment rating of BBB- to the non-investment rating of BB + on November 10.

“Shimao’s credit profile is no longer consistent with investment grade ratings due to questions about the strength of its liquidity position,” Fitch Ratings said in a comment.

The group has CNY 8.4 billion ($ 1.32 billion) in public capital market debt due in the first half of next year and CNY 11.8 billion due in the second half. Fitch expects Shimao to draw on its cash reserves worth 53 billion yuan to meet these deadlines and have certain assets to increase liquidity.

“However, failing to do so would quickly eat away at its cash reserves,” the rating agency warned.

Shimao’s share price was also affected, falling 13.0% to HK $ 5.00 on December 20 from HK $ 5.75 on December 14.

“The dumping of the shares of the Shimao group by investors is a clear sign of the gravity of the situation. Shimao was demoted to high yield by S&P, so that was a limit, but Vanke also struggled to sell units, ”said Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis. AsianInvestor. China Vanke is a Hong Kong listed investment grade real estate developer.

“Considering the importance of pre-sales for financing the entire Chinese real estate industry (54% of total financing), there is no way that even better credit developers will not be affected,” a- she added.

HOUSE PRICE EFFECT

The central problem is the slowdown in the real estate market in mainland China which threatens the entire real estate sector.

“The reality is that this is a systemic problem because real estate developers cannot withstand the very rapid drop in house prices,” Garcia-Herrero said.

The average price of new homes in 70 Chinese cities fell 0.25% in October from the previous month – the largest monthly drop since 2015, according to the National Bureau of Statistics. Prices stabilized in November, as prices for new residential and commercial properties in China’s top cities held steady from October.

China’s soft real estate market is the reason why the People’s Bank of China (PBOC) had no choice but to make more liquidity available by further reducing the reserve requirement ratio (RRR) and also to reduce the down payment requirement as well as other restrictions on the macroprudential side. , Garcia-Herrero explained.

On December 15, the PBOC decided to reduce the RRR for the second time this year in order to stimulate economic growth, including the country’s declining real estate market.

A sign that the Chinese economy is not out of the woods, the central bank is continuing its stimulus measures. On December 20, the PBOC cut the one-year loan prime rate (LPR) to 3.8 percent from 3.85 percent, in the first cut in the benchmark loan rate in nearly two years.

“Access to finance will remain restricted for the next 6 to 12 months due to tighter regulations and increased risk aversion resulting from the financial distress of China Evergrande and the defaults of several other real estate developers,” said a Moody’s report on Dec. 1.

However, access to finance for the Chinese real estate sector could improve if the Chinese government relaxes regulations, the Moody’s report said.

Nationwide contract sales will decline 5-10% in 2022, a downward revision from Moody’s previous expectation of a zero to 5% drop, the report adds.

MORE DECLASATIONS TO COME

Besides Shimao, more Chinese investment grade developers are at risk of being downgraded to non-investment grade. Fitch has placed 29 Chinese real estate developers under critical observation (UCO), indicating that companies’ ratings could change, the rating agency said on October 20.

Not all developers with a UCO will have a rating change, the Fitch report explained. “Most negative rating actions will likely be limited to downgrades or revisions to rating outlook. However, the severity of negatively rated stocks may be higher for some issuers if industry fundamentals remain weak or if liquidity positions worsen. “

The 29 Chinese developers likely to be downgraded by Fitch include six quality developers, namely BCG Chinastar International Investment, Beijing Capital Group, Beijing Capital Development Holding (Group), China Jinmao Holdings Group, Longfor Group Holdings and Sino-Ocean Group Holding. .

“Industry conditions and the funding environment have weakened since … early August following the distress of the China Evergrande group,” the Fitch report said.

The shares of Jinmao and Longfor, both listed in Hong Kong, have declined. From the start of this year through December 20, Jinmao’s share price fell 33.9% to HK $ 2.36, while Longfor’s was down 16.1% to HK 37.15 $.

China’s real estate problems caught the world’s attention after two high-profile defaults. On December 20, Kaisa announced that she had defaulted on three series of U.S. dollar notes totaling $ 488.38 million and had not paid interest on $ 17.48 million of senior notes in US dollars due December 1 for which it has a 30-day grace period.

S&P said Evergrande, the world’s most indebted real estate developer, in default on December 17. On December 9, Fitch demoted Evergrande to “Restricted Default”.