One third of China’s property developers will struggle to repay their debts in the next 12 months, according to a new report, as the sector reckons with increasingly serious headwinds from falling sales, restricted access to credit and a wider downturn.
Even if the embattled developer Evergrande manages to meet its latest debt repayment on Friday and head off a potentially disastrous default, analysts at the credit rating agency S&P warned that many other property companies could be heading towards bankruptcy.
The financial contagion sweeping through the sector represents a serious risk for China – and the global economy – as its investment and construction driven model of growth begins to creak under the strain of mind-boggling debts.
China has suffered housing market downturns before but this one is set to be “unusually intense”, S&P said.
Although Evergrande has emerged as the symbol of the debt-laden structure with liabilities of $300bn at home and abroad, the Chinese property sector as a whole owes an estimated $5 trillion, according to analysts at Nomura. That is one-third of the country’s entire GDP and roughly equivalent to the whole output of the Japanese economy, the world’s third largest.
Property companies must come up with $92bn as bond payments mature in the next year. This task has been made much more difficult because many were cut out of conventional borrowing channels after Xi Jinping’s “three red lines” crackdown on lending to the sector. Some have seen their credit-worthiness ratings cut to “B” or below, which denotes that the company is vulnerable.
“We believe that defaults will rise as firms enter a prolonged down cycle, amid heightened refinancing risk and steep maturity walls coming due this year and next,” S&P says in its report this week.
“In the most severe scenario, the liquidity of as much as one-third of rated Chinese developers will come under pressure. The entities most at risk are overwhelmingly rated ‘B-’ to ‘B+’. Over 50% of our rated portfolio of Chinese developers falls into this ratings category.”
The S&P analysts believe Evergrande is likely to default on its debt eventually. It met the deadline for its last major offshore bond repayment of $83.5m on 23 October, but only at the last minute and when it had used up a 30-day grace period after first missing the payment in September.
Its latest 30-day grace runs out on a $44m bond payment on Friday or it risks entering official default – a scenario with the potential to send a wrecking ball through a sector that represents at least 25% of China’s entire economic output. And it must come up with another $148.13m by 11 November to keep the company intact.
A smaller developer, Kaisa, is another firm under the spotlight after being downgraded to CCC rating by S&P on Wednesday night. After Evergrande, it owes the most to foreign…
Read More: Third of Chinese developers could face debt problems as Evergrande