(Nov 26): China’s property market is bracing for a worsening crisis at state-backed China Vanke Co, as the builder struggles to convince investors it can avoid default in the months ahead without clearer signs of government support.
Once China’s largest developer and now a bellwether for the nation’s struggles to ease broader property woes, Vanke plunged in credit markets this week. The builder’s local notes extended their declines Wednesday, with its 566 million yuan (US$79.9 million or $103.91 million) bond due in May 2028 dropping about 19 yuan to 75 yuan, triggering a brief trading halt.
Its dollar bond due in 2027 also fell further after sliding a record 12 cents Tuesday. It last traded at a distressed level of about 40 cents, the lowest since January.
Vanke’s woes spotlight the broader challenges facing Chinese policymakers as they balance efforts to revive a housing market stung by record builder defaults while trying to avoid getting mired in rescuing individual firms. The country has been considering new measures to turn around the market, such as subsidising interest costs on new mortgages, people familiar with the matter said last week. Yet the effects of easing measures in September last year faded after a brief recovery.
“If Vanke’s bonds default at this time, it would undermine the effectiveness of government rescue policies,” said Li Gen, a founder of Beijing G Capital Private Fund Management Center, which focuses on China’s high-yield bond market. “It may accelerate the home price declines, and the creditworthiness of other state-owned developers would come under scrutiny,” Li added.
Global banks mostly have dim outlooks for China real estate, which has been experiencing a renewed sales slump since the second quarter. UBS Group AG expects home prices to fall for at least another two years. Fitch Ratings said last month that new home sales by area could decline 15%-20% from their current level before the sector stabilises.
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As they try to cushion against the impact from debt problems, authorities are keeping a close eye on borrowers. Financial regulators are stepping up scrutiny of bond market violations, focusing on disclosure failures related to debt defaults, particularly in the real estate sector, according to a report in the official Shanghai Securities News.
Based in the southern city of Shenzhen, Vanke has long been viewed as a benchmark for gauging the government’s stance on the property sector. Its largest shareholder, state-owned Shenzhen Metro Group Co, has extended about 30 billion yuan in shareholder loans to the cash-strapped builder already, a crucial funding source that has helped Vanke repay bonds and avoid defaults so far this year.
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That lifeline, however, has been in doubt since last month, when former chairman Xin Jie resigned and the state-backed shareholder signalled tighter borrowing terms for Vanke. The notes due 2027 have lost more than 40% in the past month, in a sign of investors’ mounting concern about how the firm will navigate a wall of debt maturities in coming months.
About 13.4 billion yuan of onshore bonds are due to mature or face redemption options by the end of June next year, according to Bloomberg calculations. That’s far more than the amount of untapped loans Vanke has available from Shenzhen Metro, based on their latest pact.
According to that agreement, Vanke can receive a maximum 22 billion yuan of loans between the start of this year and the date of its annual general meeting, which is expected to be no later than June 30. Because of the loans it has already drawn, it has little left over until the middle of next year.
Vanke has lost its ability to generate cash flow and is “relying on external transfusions to keep operating”, said Zhang Dawei, chief analyst at Centaline Property. Investors are watching to see if Shenzhen Metro steps in, but its support can only keep the company afloat, not spur a full recovery, he added.
Vanke posted a wider loss in the third quarter, amid persistent pressure in the property sector. Its annual contracted sales could decline more than 40% to around 138 billion yuan, according to a Bloomberg Intelligence forecast.
Vanke faces further tests next month when two onshore bonds come due. A two billion yuan note and a 3.7 billion yuan security will mature on Dec 15 and Dec 28, respectively. If the company proposes an extension for the notes, securing creditor support could be challenging. Any proposal would require backing from at least 90% of holders of each note, according to bond prospectuses.
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