Moody’s Says Developer Default Risk to Slow Sales: China Credit

Moody’s Investors Service said the risk more Chinese property developers will default, after the collapse of Zhejiang Xingrun Real Estate Co., will make it harder for them to raise funds just as apartment sales cool.

The builders have issued $500 million of offshore yuan or dollar bonds this month, compared with $1.6 billion in the same period last year and a record $9.2 billion in the first quarter, data compiled by Moody’s show. Notes in Bank of America Merrill Lynch’s emerging markets index of Chinese corporates including property companies returned 0.8 percent in the past year. That compares with a 1.5 percent total gain for bonds globally, according to Bank of America.

“Investors are concerned certain developers will go into more defaults,” Franco Leung, an analyst at Moody’s said in an interview on April 23, predicting a drop in developers’ offshore debt issuance in the coming six months. “While China’s economy is slowing, there will be stress on companies with weaker credit profiles.”

The world’s second-largest economy expanded 7.4 percent in the first three months, the weakest pace in six quarters, spurring speculation that the government will be forced to ease curbs on real-estate investment. Property sales in the period fell 5.2 percent from a year earlier and the floor space of new property construction dropped 25.2 percent, statistics bureau data showed on April 16.

Good Names

Samson Lee, head of debt capital markets at BOC International, a unit of Bank of China Ltd. in Hong Kong, said investors are still interested in property bonds, even though they have become more selective after the collapse of Zhejiang Xingrun. He said issuance will grow at a slower pace than last year rather than decline.

“Some good names still can issue bonds,” Lee said. “But it will be difficult for some lower-rated companies to sell.”

Poly Real Estate Group Co., which employed more than 23,000 people at the end of last year, sold $500 million of five-year bonds this month at a yield of 5.25 percent. That compares with a coupon rate of 4.5 percent in similar-maturity paper issued in July last year.

Yield premiums on dollar debt sold by Chinese borrowers have risen 35 basis points this year, according to JPMorgan Chase & Co. Six out of the 10 worst Chinese corporate bond performers in the past month are property notes, according to data compiled by Bloomberg. Renhe Commercial Holdings Co.’s 2015 bond recorded an annualized loss of 24 percent, according to Bloomberg data.

Rising Costs

Onshore benchmark borrowing costs have risen, with the yield on China’s five-year sovereign note climbing 87 basis points over the past year to 4.01 percent. The premium investors demand to hold similar-maturity AA corporate securities increased 42 basis points to 291 basis points. The yuan weakened

3.4 percent this year to 6.2580 per dollar yesterday.

The property industry has to deteriorate much more from current levels before any serious central government support is seen, Jinsong Du, head of property research at Credit Suisse Group AG, wrote in report on April 28.

“Previously people thought that property sales will improve eventually, but now they’re starting to realize that may not be the case,” Du said in an April 28 interview from Hong Kong. He said it’s “definitely more difficult now” for developers to sell dollar bonds.

Credit Events

Wang Ying, an analyst in Shanghai at Fitch Ratings Ltd., said there may be more property defaults, including loans, trust financings and bonds, for the rest of 2014 and possibly through

2015. She said developers’ total offshore note issuance in 2014 may fail to exceed that of last year.

“If there is an increase in the outbreak of credit events, including defaults in the property sector, offshore investors’ demand may decline,” said Wang. “New issuers will probably have to either accept higher borrowing costs or scrap sale plans.”

Moody’s forecast growth in Chinese property sales in 2014 will be ‘significantly’ down from the 27 percent in 2013. Leung said it’s possible that more Chinese developers will default this year, following Zhejiang Xingrun, as smaller developers have limited access to funding.

Developers including Agile Property Holdings Ltd., which is based in the southern Chinese city of Guangzhou, and Hong Kong’s Wharf Holdings Ltd. cut home prices in some eastern Chinese cities this year. China’s broadest measure of new credit in March fell 19 percent from a year earlier and money supply grew at the slowest pace on record, according to the People’s Bank of China.

China Vanke Co., the nation’s biggest developer by market value on mainland exchanges, said on April 28 first-quarter profit dropped 5 percent to 1.53 billion yuan as revenue slumped after it completed fewer new projects than planned.

“If you look at the numbers for the first quarter, nation-wide residential property sales were weak, which has weakened liquidity for developers in general,” said Moody’s Leung. “Banks are tightening their credit to smaller developers. It’s not unlikely we will see more developers going into trouble, particularly smaller and highly leveraged developers.”