Moody’s has revised its outlook on China’s property sector to negative from stable on tightened funding access due to tighter regulations and refinancing risks. The Chinese regulators had imposed guidelines in January this year, limiting banks’ exposure to the property sector thereby reducing developers’ access to loans for construction and homebuyers’ access to mortgages for home purchases. This resulted in the slowest growth in loans to developers in 1H2021 in recent years, as per Moody’s. The interest rates and approval times for mortgages have also increased since 2Q2021. This has adversely affected home sales and associated cash flows of developers. Following defaults by a few developers including China Fortune Land Development Co., Ltd. (CFLD) and Sichuan Languang Development Co., Ltd, the bond markets have been subject to high volatility which has resulted in bond issuance slowing down. The rating agency expects national contracted sales to decrease 0-5% during the coming 6-12 months, driven by declining sales volumes and slowing average sales price growth. According to Cedric Lai, Moody’s Vice President and Senior Analyst, “China’s regulations aimed at controlling property prices and sector leverage, as well as containing the banking system’s exposure to property market, have curbed developers’ funding access. Property sales, liquidity and cash flows will drop, raising refinancing risks particularly for financially weak developers. Meanwhile, lenders and investors will continue to favor medium-to-large financially sound developers”. We had reported in July that Chinese Developers’ dollar bond spreads had widened due to an increased focus on the regulators’ “three red lines” metrics.
In a related development, S&P has downgraded Risesun Real Estate to B+ from BB- due to a challenging operating environment over the next one to two years especially for projects in Hebei province and reduced margins from other projects. The long-term issue rating of the dollar notes guaranteed by the company has also been lowered. The rating agency expects the company’s sell-through rate in its home market to normalize toward 55-60% only over the next 12 months, from the current 45-50%. Risesun’s leverage (debt-to-EBITDA) is forecasted to worsen to 4.6-5.0x in 2022, and further to 5.4-5.8x in 2023, from an estimated ~3.9x in 2021. The rating agency said, “Business challenges and market volatility will weigh on Risesun’s access to debt capital markets for refinancing. The company’s deteriorated access is highlighted by the significant pricing slump in its U.S. dollar senior notes over the past few months. The company faces about $780mn in offshore maturities due before May 2022, while within 2022 it has about RMB 4bn ($620mn) in domestic bonds maturing or puttable. Together these represent 99% of the company’s outstanding capital market issuances.” Despite the pressures, the rating agency expects the property developer to manage its debt maturities given that it has unrestricted cash of RMB 26.3bn ($4.1bn) and could generate free operating cash flow of RMB 5.1-5.5bn ($790-850mn) in 2021. The contracted sales are also expected to sustain over the next one to two years. The company is rated BB- by Fitch and at Ba3 by Moody’s.
RiseSun’s $300mn 8.95% due January 2022 were down 2.93 to trade at 63.57 cents on the dollar, now yielding 187.36%. Similarly, Rongxingda’s $500mn 8% 2022s guaranteed by RiseSun and maturing in April next year were trading at 57.86, yielding 121.48%. The bonds were trading close to par at the start of 2021.