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 to 6, 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 BBB- 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 $400bn 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.
Evergrande, the worlds most indebted developer with more than $300bn 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 $400m 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+ in January to CC 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.
Concerns over the sector have also roiled high-yield bond markets in Asia. Effective yields on Chinese high-yield borrowers leapt in November to almost 30 per cent, their highest level since the global financial crisis. They are currently trading at 22 per cent, according to an ICE index, in a sign that panic across the market has receded.
However the crisis still has the potential to ripple over to more trusted borrowers. Shimao, a developer that had not been downgraded, was placed this week by S&P on a lower rating of B+ for “weakening funding access”. The company’s bond maturing next year collapsed to 59 cents on the dollar in December and is currently trading about 65 cents.
Analysts at Citi noted last week that the company was “trying to bolster confidence by slowing land bank acquisitions, reinforcing cash collections, disposing of non-core assets and raising capital through new share placements”.
But they added that as developers have “turned from a growth model to survival mode, declines look unavoidable for Shimao’s contracted sales and earnings”.