Defaults risks for other developers, PBOC on Evergrande

Aerial photography of “River View House” on the side of the Yangtze River. Yichang, Hubei Province, October 16, 2020.

Coastfoot | Barcroft Media | Getty Images

The fallout in China’s real estate sector shows no signs of abating, as more developers risk default – even as uncertainty over the debt-burdened Evergrande’s fate looms.

All eyes will be on Chinese real estate developer Sinic Holdings, which warned last week that a $250 million offshore bond repayment due on Monday was unlikely. No word from the developer until noon. CNBC has reached out to the company.

On Friday, another developer, China Properties Group, said it had defaulted on a $226 million bond, because it failed to secure the funds by the October 15 due date.

They weren’t the first – Fantasia Holdings failed to repay a $206 million bond in early October.

Last week, rating agencies released a new round of cuts to Chinese real estate companies.

This week, Evergrande will be officially in default if it doesn’t pay interest on the offshore US dollar bond – the payment was due in late September but has a 30-day grace period. The company has been silent about coupon payments on four other bonds that have been due in the past few weeks.

The developments come as China’s central bank said on Friday that the risks posed by Evergrande are “controllable”, and that most of the country’s real estate companies are stable.

However, the People’s Bank of China also said that real estate companies that issued bonds overseas – referred to as offshore bonds – should actively fulfill their debt obligations.

On Sunday, central bank governor Yi Gang made additional comments. He said authorities would try to prevent Evergrande’s problems from spreading to other real estate companies, according to Reuters.

The news agency reported that he also said the Chinese economy was “doing well”, but was facing challenges such as default risks from “mismanagement” at certain companies.

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China’s real estate developers have grown rapidly after years of excessive debt, which prompted the authorities to implement the “three red lines” policy last year. This policy sets a debt limit in relation to the company’s cash flows, assets and capital levels.

Things came to a head after politics started to rein in developers. Evergrande, the world’s most indebted developer, warned twice last month that it could default.

It has since defaulted on three interest payments on its US dollar bonds. The stock has been on hold since October 4, and rating agencies downgraded other real estate companies due to concerns about their cash flow.

Trading of Chinese real estate bonds has risen to more than $1 billion so far in October, from more than $600 million in August, according to data from online fixed-income trading platform MarketAxess. It said Evergrande’s 8.75% bond due in 2025 is currently the second highest-traded bond in emerging markets on its platform.

More discounts in the rating

There was a new round of cutbacks at other Chinese real estate firms last week.

CNBC has reached out to each of the companies for comment, but has yet to receive a response.

1. China Aoyuan
On Friday evening, S&P Global Ratings downgraded China Aoyuan, one of the largest developers in China’s Guangdong province focused on the country’s Greater Bay Area. Noting its high debt, the rating agency said the company’s move to reduce debt will slow over the next year.

It also set the maturities of Aoyuan’s “big” bonds due in 2022, which will put more pressure on the real estate company.

One thing we can be sure of is that the real estate sector is suffering.

Julian Evans-Pritchard

Chief Chinese Economist, Capital Economics

“The company’s low vision on revenue growth and continued margin pressure will hamper deleveraging efforts. Weak cash generation will also put pressure on Aoyuan’s liquidity as it faces significant maturities in 2022, though we expect the company can still settle in a more relaxed position. tightly,” S&P said.

2. Modern Earth
Fitch also cut Modern Land’s rating on Friday, citing the developer’s move to delay repayment of a $250 million overseas bond by three months.

3. Greenland Holdings
Prior to Friday’s downgrade, S&P on Thursday downgraded Greenland Holding – one of the largest property developers that owns prestigious properties in cities such as New York, London and Sydney. It also cited its “weak” access to finance, which will limit its ability to withstand the downturn in the real estate industry. Fitch said it expects the company’s ability to generate cash to slow.

“Greenland bond prices fell sharply again after broader investor concerns about the sector,” Fitch wrote. “Prolonged weakness in bond prices could hurt the confidence of the company’s borrowers, suppliers and buyers.”

Characteristics of China’s “struggling”: Capital Economics

New home sales have fallen in recent weeks and are now 25% below 2019 levels, research firm Capital Economics said in a note on Friday.

“It is possible that the Evergrande disaster has raised homebuyers’ concerns about whether developers will honor pre-sale commitments,” said Julian Evans-Pritchard, chief China economist at Capital Economics.

Meanwhile, developers’ purchases of land slumped as they “blocked the doors” to weather slowing sales and constraints on their financing, the economist added. This indicates a further decline in new housing projects in the coming months.

“One thing we can be sure of is that the real estate sector is suffering,” he wrote.

Looking ahead, he expects further easing in the real estate sector policy, as the authorities look to boost housing demand. Evans-Pritchard wrote that this could include lowering the minimum down payment requirements for first-time homebuyers, and lowering interest rates to lower mortgage costs.

“We do not expect policy makers to ease restrictions on developer financing or allow a sharp rebound in overall credit growth,” he said. “Leadership, we believe, remains committed to reducing developer leverage.”

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