China Vanke Gets S&P Downgrade, Faces Rejig Amid Debt Crisis

The troubled property developer China Vanke copped another blow on Friday – a downgrade by ratings agency S&P Global.

The agency described Vanke’s financial commitments as unsustainable, because of its weak liquidity levels.

The news came after Vanke bonds and stocks tumbled to record lows this week, with declines initially sparked by a media report that it might face a debt restructuring.

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The state-backed firm then announced on Wednesday it was seeking to delay an onshore bond repayment for the first time. A bondholder meeting is due to be held on December 10.

The debt woes at Vanke, one of China’s most high-profile developers with many projects in major cities, have revived concerns that the country’s real estate sector could fall back into crisis.

The industry, which once accounted for as much as a quarter of GDP, was hit by a liquidity crunch in 2021 after regulations were tightened and dozens of developers have since defaulted on debt.

Among those hardest hit, former industry titan China Evergrande was ordered by a court to liquidate and was ignominiously delisted this year because of its staggering $300-billion debt load.

REITs market to be broadended

Vanke’s troubles appeared to rekindle fears about a spillover into the broader property sector. And that led to Beijing unveiling plans on Friday to expand the public real estate investment trust market to include commercial properties.

China’s securities regulator published draft rules for a pilot programme of commercial real estate investment trusts (REITs), seeking to “enrich investment and financing tools and support a new growth model for the real estate industry.”

It also came a day after China’s state planning agency said it is looking to expand China’s REITs scheme to include more types of underlying assets such as hotels, office towers and stadiums.

Currently, eligible assets in China’s REITs program include industrial parks, highways, logistics parks, shopping malls and data centres.

An expansion of China’s REITs scheme would enable developers to raise money more easily, while giving public investors access to more types of income-generating properties.

It is not clear if the planned REITs expansion is related to difficulties facing Vanke, which operates both residential and commercial properties.

A possible debt restructuring by state-owned Vanke – a household name in China’s biggest cities – could have an even bigger impact in the already fragile market than the defaults by privately-owned Evergrande and Country Garden.

China’s property sector slump is now in its fourth year and continues to squeeze funding. China Evergrande is in liquidation proceedings, while peers have wrestled with protracted restructurings.

Country Garden has been working towards offshore relief since 2023 and now needs shareholder and regulatory approvals to issue bonds worth about $13 billion as part of an offshore debt restructuring. That includes issuance of warrants and new shares, but could cut more than $11 billion in debt if fully implemented, the company said. (An extraordinary general meeting on December 3 will vote on the bonds and share issuance, and the scheme is expected to be complete by the year-end.)

Vanke on CreditWatch after rejig order

In S&P’s new report, the agency said Vanke’s long-term issuer credit rating was now CCC- down from CCC, and it placed the company on CreditWatch with negative implications.

“The company’s debt obligations are currently vulnerable to risks of nonpayment or distressed restructuring, in our opinion,” the report said.

S&P said Vanke faced a bond maturity wall of 11.4 billion yuan ($1.6 billion) between now and May next year, and forecast Vanke would have negative operating cash flow during that time.

Vanke is about 30% owned by Shenzhen Metro, and that state backing had been considered enough to stop the company from sliding into severe financial trouble.

But on Tuesday, financial news outlet Octus reported that Beijing had given preliminary guidance to Shenzhen government, where Vanke is based, to consider a “market-oriented approach” for dealing with the developer’s debt.

The phrase is a euphemism for restructuring, the Octus report said.

Analysts noted the central government’s primary concern was more to do with ensuring that homes that had been ordered up and paid for were actually completed.

“Policy signalling has been consistent about the push for the delivery of pre-sold homes, and they have executed on that, not the support for developers per se,” said Robert Ciemniak, CEO at Real Estate Foresight, who publishes on SmartKarma.

Bonds and shares plunge

The slide in Vanke’s bonds and stocks accelerated after the company said it was seeking bondholder approval to delay the repayment of a 2 billion yuan ($280 million) onshore bond due on December 15.

Among its bonds hitting record lows on Friday was one due in March 2027, which plunged 22.5% to 31 per 100 par value. It had traded at 85 on Monday.

It and three other Vanke yuan bonds that dropped 20% or more were suspended from trade.

Vanke’s Shenzhen-listed shares were down 1.6%. Its Hong Kong-listed stock was up 0.8% after hitting a record low a day earlier.

Just how much effect Vanke’s woes spill over to the rest of the sector remains to be seen. But the industry continues to struggle. China’s new home prices fell at the fastest monthly pace in a year in October, highlighting persistently weak demand.

Vanke has a total of 364.3 billion yuan in interest-bearing liabilities, and in late October it reported a third-quarter net loss of 16.1 billion yuan.