MNI: China Property Calm May Precede More Dollar Defaults

Chinese property developers are scrambling to regain investor confidence in the wake of the Evergrande scare, but further defaults may be inevitable as tens of billions of dollars in debt come due over the next year and authorities insist on longer-term plans to reduce leverage in property sector, policy advisors and industrial experts told MNI.

Immediate concerns over developers' dollar bond interest and maturity payments have dissipated since the People's Bank of China bank relaxed some controls on lending to developers and buyers, and regulators will continue efforts to stabilise house and land prices, said Liu Xiangdong, deputy director of the Department of Economic Studies at China Center for International Economic Exchange.

"For regulators, the priority is preventing risks and the precondition of any move is avoiding systemic risk, including a surge of bad loans from lenders," Liu said. But regulators are not expected to abandon property sector deleveraging reforms, and some developers may struggle to survive, he added.

Challenges ahead are significant. As much as USD63.7 billion in dollar bonds issued by developers will mature over the next 15 months, including USD54.4 billion in 2022, according to Everbright Securities.

Any improvement in access to funding is likely to be temporary, said Franco Leung, Associate Managing Director at Moody's Investors Service. Policymakers will insist on reducing property market risks, as well as reliance on property investment as an economic growth driver and store of household wealth, he said, adding that developers with weak liquidity buffers, vulnerable funding structures and poor sales will be vulnerable.

CREDIT EASING

A more upbeat tone on property was sounded by state media publication Shanghai Securities News on Wednesday, when it reported that lending to developers went "basically back to normal" in October, citing unidentified authorities. Property company shares rose following the report, and high-yield offshore dollar bond prices gained on the day.

But developers must sustain house sales to pull through, said Fang Ling, a senior fellow at CIRC. In addition, some need to restructure debt, by extending maturities and selling high-quality assets to raise cash for rolling over the matured debt, she said.

This will be no easy task. With some banks reducing mortgage loans and hiking rates, 90% of the top 100 developers in China saw contractions in house sales in September, while 60% of them suffered drops of at least 30% year-on-year, according to CRIC.

Since June, 13 developers have redeemed about USD1.6 billion of offshore bonds, 58% of which were set to mature in Q4 and 2022, according to CIRC. Some redemptions even covered debt maturing in 2023 to 2026, noted Fang. But the early payments were mainly calculated to boost market confidence and stabilize bonds price, she said, although developers could solve the debt risk in short term, a bigger burden and tougher time are still ahead, she continued.

An ominous signal comes from downgrades across the sector by rating agencies, putting some companies in breach of borrowing covenants and raising the need for more liquidity in the short term, Fang said.

UNCERTAINTY

Up to late October, offshore bond issuance by Moody's-rated developers declined to USD300 million, from USD4.2 billion in September. Low levels of offshore issuance will continue unless market sentiment and credit conditions materially improve, according to Leung.

Chang Shuyu, researcher at the Chinese Academy of Social Sciences, said both regulators and investors need to keep a close eye on offshore dollar bond risks spilling into the broader property sector.

Many developers turned to the offshore market after facing tighter regulations for onshore funding in recent years. The offshore market has surpassed the domestic bond market as a key refinancing channel for many developers, Chang said.

She suggested that regulators allow some heavily indebted developers to default, while ensuring refinancing channels for companies with healthy balance sheets.