Market participants are bracing themselves for more defaults this year in China's battered property sector, as old problems linger and a recovery seems as far away as ever.
While last year saw fewer defaults than 2021 and 2022, it was marked by large ones such as that of Country Garden Holdings, the largest developer in terms of projects. Meanwhile, the poster boy for the crisis, China Evergrande Group, had to put its restructuring on hold after it was unable to issue new debt as part of the plan.
This January has brought a fresh batch of restructuring-related announcements, including the release of Logan Group's restructuring plan on January 12, but more bad news is expected. Analysts say defaults will come this year both from developers that have so far kept their heads above water and from others which already defaulted and extended their debt but have been unable to regain their footing since.
Non-defaulted private property developers need to repay a combined Rmb39.3bn (US$5.5bn) of onshore bonds and US$5.5bn of offshore bonds this year, higher than last year’s Rmb34.6bn and US$3.9bn figures, according to Fitch.
“Contracted sales are still the most important source of funds for refinancing,” said Esther Liu, a credit analyst at S&P. “We think it’s highly possible that some defaulted developers will fail to meet their debt obligations again this year. For non-defaulted developers, depending on each company’s sales and maturities, there is a possibility that sporadic defaults could still happen.”
Iris Chen, an analyst at Nomura, said Gemdale is a key name to watch this year as it faces high onshore maturities, especially in the first half. LSEG data show it has a total of Rmb14bn in bonds due this year, including a US$480m 4.95% note.
China Vanke is also experiencing a funding crunch, as it has a US$630m 5.35% March 2024 and a US$600m 4.2% June 2024 outstanding. However, the notes are still trading at healthy levels between 96 and 98.8.
“This year will be the most difficult year for Vanke. It’s the peak year for project deliveries, and the situation will get worse if the contracted sales remain weak,” said Meng Ting, senior Asia credit strategist at ANZ. “But if the company can meet debt obligations this year, there’s less liquidity pressure for it next year.”
Tyran Kam, senior director for Asia Pacific corporate ratings at Fitch, sees little default risk from Vanke and Longfor Group Holdings, the top two unbroken private developers. He said both companies have strong bank access and are relatively more focused toward higher-tier cities, giving them a higher level of financial flexibility.
Danger of relapse
On the other hand, some companies that managed to extend maturities are now in danger of relapse as these maturities come due. Some of the issuers who chose to "amend and extend" during the first wave of defaults in 2021 have not deleveraged much since. Ricky Tsang, a credit analyst from S&P, said those companies may face lower-than-expected sales and asset disposals, triggering a second default.
Dalian Wanda Commercial Management Group managed to raise US$700m from surprise high-yield bond sales at the start of 2023, but these bonds were trading at distressed levels six months later. Since then, offshore fundraising for China high yield has ground to a halt.
“For the US dollar bond market, investors have been very conservative, and their expectation has been well-adjusted for the prolonged sector downturn. We don’t expect there’ll be a big rally in bond prices like last year, but there’ll still be some opportunities from some high quality state-owned developers,” said Chen.
Last year saw a few temporary market rallies in response to supportive policies, but these petered out as the fundamental picture did not improve overall.
The sector is unlikely to see a true recovery until contracted sales pick up, but the prospects do not look good.
Both S&P and Fitch forecast another 5% year-on-year decline in contracted sales in 2024 due to weak performance in the lower-tier cities. Sales dropped 17% in 2023, according to China’s National Bureau of Statistics.
With sales crippled, fewer developers are chasing significant sales growth or starting new projects. The focus has shifted to project completion in top-tier cities.
“In December, the contracted sales from the top 100 developers dropped 35% year on year. There’s no sign of sales recovery so far and it’s too early to tell whether the sector has reached the bottom yet,” said ANZ's Meng. She said the numbers in March or April, after February's Lunar New Year holidays, will be more indicative.
S&P believes the market will reach the bottom this year, but it expects an extended L-shaped recovery, with sales stabilising around Rmb10trn, similar to 2016 levels.
Restructuring in focus
Restructurings remain in the spotlight, as a number of companies are beginning to make progress with investors or are feeling legal pressure to wrap up their plans. In the past two months, Powerlong Real Estate Holdings and Logan Group announced restructuring plans, CIFI Holdings (Group) listed preliminary terms, while DaFa Properties Group and Country Garden hired financial advisers.
But the overall progress has been slow, which Meng said is partly because developers have limited cashflow to support restructurings. On top of weak contracted sales, access to the capital market is shut and cash flows out to deliver projects.
“Unless the market stabilises and projects are completed, I don’t think companies will put much focus on offshore debt restructuring,” she said.
Liu at S&P said whether companies are willing to take steep enough principal haircuts to restore their balance sheets is the key question.
“We believe developers can only return to stable operation once their debt is reduced to a level that matches their assets. However, we’ve only seen a few cases where developers’ balance sheets have been repaired,” she said.