China’s weakest property developers risk defaulting on their US dollar bonds as home sales suffer and access to money dries up due to the coronavirus epidemic.
Payment defaults on dollar bonds from Chinese issuers are rare, and payments missed by developers have been almost non-existent in recent years, even though default payments by companies in the country hit a record high in 2019.
But the rapid spread of coronavirus from central China has increased the risk of property default this year – an event that would send shockwaves to the market – as several cash flows of medium-sized groups are reduced while being closed from the market to refinance existing ones. debts.
Developers have to pay around $ 20 billion in U.S. dollar bonds maturing this year, according to data from Dealogic. They raised a record $ 22 billion in the first two months of the year, surpassing the previous peak in 2019, when developers more than doubled the issue in U.S. dollars.
The total market for US dollar bonds issued by Chinese developers via offshore financial centers like Hong Kong is much larger. S&P alone measures approximately $ 185 billion of this debt, part of which is held by international investors.
“The only way to survive is to have a lot of money on hand right now,” said Cheong Yin Chin, senior real estate analyst at CreditSights in Singapore.
The biggest risk of default this year is the Tahoe group, a company in Fujian province that builds homes across China. The mid-level group started a wave of acquisitions in 2016, buying Hong Kong insurer Dah Sing Life for $ 1.4 billion in 2016, but has since run into cash flow problems.
Tahoe has about $ 730 million in US dollar bonds maturing in the next 12 months, but hasn’t told investors how it plans to repay them. A $ 530 million bond maturing in January of next year has been struggling since 2018, but has dropped to new lows last month and is now trading at 73 cents on the dollar.
“There is a list of names that are in bad shape this year [due to the outbreak]”Said an investor looking for troubled real estate transactions. The person noted that Tahoe was among those who may be forced to sell their assets at very reduced rates.
Tahoe did not respond to a request for comment.
Another developer, Sunshine 100, listed in Hong Kong, is struggling to pay off the US dollar debts owed this year. The group has refinanced some of its debts but analysts fear that this is not enough to repay a $ 400 million bond due in September.
“It took a while, but if the viral situation continues, Sunshine will not be in good shape,” said Cheong of CreditSights.
China Yida, Guorui Properties and Guangzhou R&F face similar problems but have developed refinancing options.
The Covid-19 epidemic ended economic activity in large parts of China, leaving tens of millions of people unable to move freely in cities. In many places, this means that potential buyers cannot go out and look for new apartments.
Although February sales figures are not yet available, a report by real estate researcher E-House showed that in the first week of February, less than four homes per day were sold in Beijing. Normally, hundreds of houses change hands every day.
The crisis has caused major problems for developers, many of whom are highly indebted and need cash flow from the sale of properties to pay their debts.
“The risk of default is much higher now given the virus epidemic,” said Christopher Yip, director of S&P Global Ratings, about the debt of developers.
Learn more about the impact of coronavirus
Subscribers can use myFT to follow the latest “coronavirus” coverage
