S&P Global Ratings expects more defaults among China's property developers as the recent policy crackdown on the country's residential market adds more strain to their finances, making it more difficult to free up cash and settle outstanding debts.
Over the next 12 months, S&P-rated Chinese developers will face $18 billion of maturing debt. While the figure is lower than the roughly $40 billion of maturing debt as of 2021-end, access to new and even existing funding channels remains limited, especially as investors' confidence is shaken by problems in the sector that were further highlighted by events such as defaults at China's largest developer, China Evergrande Group, Ratings said.
"Declining sales, tight liquidity and cash trapped in escrow or joint venture partners all point to rising defaults," the rating agency said in its "China's Property Downcycle Won't End With Policy Easing" report.
Changing market
China's policy on housing has always been based on the principle that "housing is for living, not for speculation." For now, the rollout of a property tax is on hold due to market conditions, but rules that have already been implemented to redirect focus on the completion of pending housing projects are expected to change the market and make it less conducive to the "highly leveraged, fast-churn strategy" that has been successful for many developers in the past.
According to the report, offshore bond issuance declined 94% in the first two months of 2022, reflecting fallout for speculative-grade issuance, while bank loans and trust financing are also "much harder to get."
Insolvency risk
Due to stresses within 2021, "some 20% of the China developers we rate would be insolvent if they failed to obtain new funding," Ratings said in a press release for the report.
The report added that the 20% of developers likely to be insolvent are mainly rated B+ or below, and that if landbanks and assets have to be sold at a 30% discount, this ratio goes to 40% and would also include BB category ratings.
Declining sales
In the first three months of 2022, residential property sales declined 50% year over year for China's top-100 developers, with Ratings expecting national sales to fall by 15% to 20% in 2022, and by 3% in 2023.
The rating agency said many developers will not be able to easily develop new resources for future expansion due to the cash crunch in 2022. It added that the increase in government-funded affordable housing supply will also gradually eat into the commercial housing market.
Counterpart risk
While joint venture partnerships have provided some balance-sheet relief to developers in recent years, this raises counterpart risk when a developer's liquidity deteriorates, Rating added.
According to the report, banks or trust companies might lock up money in the project company if one party faces a crisis, hence spreading stress automatically to other project participants.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.