Higher credit risks loom for China firms
Mainland developers are facing higher credit risks with their short-term debt surging significantly amid weaker liquidity, according to rating companies, which warn that the situation is likely to get worse.
Latest research by Moody's Investors Service found 11 out of 29 mainland developers had weak liquidity under a stress test last week, up from four developers in a similar study done at the end of last year.
The test measures the ratio of cash and contract sales receipts a developer should expect this year to the aggregate of construction costs, interest, debt, land and other payments. A developer will be identified to have weak liquidity if its score is below one.
'The deterioration stems specifically from higher levels of short-term debt and lower-than-expected cash balances for the end of 2011 against the backdrop of slowing sales and rising inventories,' said Peter Choy Sing-yip, an associate managing director at Moody's.
Of the 11 developers with the lowest scores, Coastal Greenland, Hopson Development, Greentown and Shanghai Zendai were found to face the highest risk of restructuring debt or conducting a distressed-debt exchange.
The total amount of short-term debt these 29 developers were due to repay this year reached 159 billion yuan (HK$195 billion), up 23 per cent from that in December last year, the ratings agency said.
Constraints on offshore and onshore funding, including regulatory curbs on trust financing, had also resulted in weaker liquidity for developers, it said.
Moody's maintains a negative outlook on China's property sector because it anticipates continued weakening in fundamentals over the next 12 months.
Choy also said it was unlikely Beijing would ease its monetary controls on property sales and bank credit before April next year, when the country's leadership will change.
He expected mainland developers to face more severe credit problems this year.
In a separate report, Standard & Poor's Rating Services said debt due within 12 months for the 30 mainland developers it surveyed rose 57 per cent to 156 billion yuan as of December last year from 2010,
At the same time, cash reserves declined 12 per cent to 176 billion yuan.
'Many of China's property developers are caught between a rock and a hard place. They started 2012 with historically high debt maturing within 12 months and weakened liquidity,' it said in a yesterday's report.
'On the other hand, the outlook for property sales is poor and refinancing conditions are difficult.
'As a result, financially weak property developers are likely to face a test of their survival this year,' the report said.
It said developers with large maturing debts and refinancing risks on their offshore debt and trust loans would have to push property sales by aggressively cutting prices.
Polarisation of the sector would continue as the large and financially strong developers had access to funding for further growth, it added.