Chinese property developers hit by record rating downgrades

Downgrades come as Evergrande collapse fuels fears over health of China’s economy

Chinese property developers have been hit by record numbers of downgrades from international credit rating agencies this year, as Evergrande’s collapse fuels concerns over the health of China’s economy.

The downgrades come after Beijing introduced measures last year to cool an overheating property market and a liquidity crisis that is threatening to spread to more trusted borrowers.

Moody's, Fitch and S&P downgraded Chinese developers' ratings 43, 54 and 30 times, respectively, in 2021, compared with six, 12 and 11 in 2020, adding further pressure on their ability to refinance offshore debt during a housing slowdown.

A Financial Times data analysis of the biggest borrowers shows that while riskier developers were subjected to significant downgrades in the past year, the ratings of investment-grade companies were largely unchanged.

Credit ratings of triple B minus and higher are investment grade, while those below are high yield.

Buoyed by China's rapid urbanisation, the country's real estate developers are large borrowers domestically and overseas, and in Asia they make up a big portion of the region's $400 billion corporate high-yield bond market. They came under stress after Chinese president Xi Jinping's government moved to constrain their leverage over fears of asset bubbles in the property sector.

Unravelling

Evergrande, the worlds most indebted developer with more than $300 billion in liabilities, started unravelling this summer as it struggled to generate enough cash to service its debts and keep its vast empire of real estate projects running. It missed multiple international bond payments from late September and was finally declared to have defaulted by Fitch this month.

The liquidity issues at Evergrande, which is in restructuring talks, spread rapidly to other developers. Kaisa, another large borrower on international markets, failed to repay a $400 million bond this month. Other developers Fantasia and China Modern Land have also defaulted in recent months.

Kaisa this week said it was in talks with bondholders on a restructuring plan and that it had hired as an adviser investment bank Houlihan Lokey, which is also acting for Evergrande.

S&P downgraded its ratings on Evergrande’s bonds from B plus in January to double C by September, before they were removed at the request of the company last week.

In early December, Fitch downgraded Evergrande to “restricted default” after there was no sign of payments on bond coupons it owed to investors following the end of a 30-day grace period. Fitch noted that “the company did not respond to our request for confirmation on the coupon payments”. Evergrande has yet to make any official disclosure on the payments.

Weakness across the developer sector has put the spotlight on China’s economy, which has struggled to maintain momentum this year following a rapid rebound from the start of the pandemic in early 2020. Land purchases have slumped and new home prices have fallen month on month for the past three months. – Copyright The Financial Times Limited 2021

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