A mad scramble by Chinese property developers to build up their land banks is taking its toll on the industry’s creditworthiness, with builders singled out as having the highest risk of default as channels of credit tighten.
The Bloomberg Default risk model, which tracks metrics including share performance, liabilities and cash flow, shows a 0.87 percent average probability that builders will renege
on its obligations in the next 12 months.
While the proportion may look small, it’s triple the likelihood of delinquency in the technology industry. About three-quarters of developers have seen their default risk climb over the past year, Bloomberg data show.
“Investors need to pay attention to the fundamentals of issuers that have lots of debt maturing,” said Li Shi, general manager of rating and bond research department at China Chengxin International Credit Rating Co., which estimates that property developers saw the worst deterioration in cash flows among industries last quarter.
“They should also watch out for builders that have rising short-term debt and worsening liquidity.”
Builders have loaded up on debt to expand their land holdings in China’s property market, which has boomed over the past decade thanks to urbanisation and the growth of the middle class.
Total property values in China amount to some $22 trillion, according to Pacific Investment Management Co. And until early this year, that strategy won the applause of stock investors for big players like China Vanke Co. and China Evergrande Group.
With China’s economic growth now slowing, and its policy makers proceeding — albeit carefully — with a financial deleveraging campaign — the proverbial chickens are coming home to roost.
Facing a record amount of maturing debt, the challenge is on for developers to find ways to refinance. Some are getting creative, such as China Vanke’s move to sell floating-rate notes in dollars last month.
For others, creativity hasn’t been enough. Wuzhou International Holdings said this month it defaulted on debts. Zhonghong Holding Co. said it had overdue borrowing of 3.5 billion yuan. Both S&P Global Ratings and Moody’s Investors Service see a negative rating trend for the industry in the near future due to the tough funding environment.