Developers' ratings at risk, S&P warns

PUBLISHED : Thursday, 16 June, 2011, 12:00am
UPDATED : Thursday, 16 June, 2011, 12:00am

Mainland property developers, many of which have been borrowing heavily to fund growth, could face negative rating actions from Standard & Poor's after the ratings agency warned the sector was likely to suffer as a result of credit tightening and slow sales.

In a report yesterday, S&P said it might have to revise ratings to negative on highly geared mainland property developers in the next six to 12 months if expected weak sales took a toll on the companies' financial positions.

Mainland developers have taken out large loans and debt to fund their buying sprees to boost their land banks over the past five years.

According to a report by HSBC last month, direct lending from banks to property developers amounted to 2.49 trillion yuan (HK$2.99 trillion) as of the end of the first quarter this year, constituting 5 per cent of total outstanding bank loans.

A popular but more costly way for mainland developers to borrow is to sell bonds.

Bonds issued by mainland property developers made up about half the high yield bonds issued in Asia.

Since the beginning of this year, rated Chinese developers have issued US$8 billion in offshore bonds, compared with US$8.8 billion for the whole of last year, the last peak for the sector, S&P said.

Seventy-five per cent of publicly rated developers in the Asia-Pacific have a speculative grade, reflecting a higher risk of default from the issuers of debt.

Investors in such bonds often seek higher rates of interest on the bonds to compensate the higher risk.

A negative action or a downgrade by a ratings agency could increase the rate an issuer has to pay on the debt, making fund raising an expensive move.

There are already signs that the growth of the mainland property sector is cooling.

Property prices have risen but at a slower pace, according to HSBC, which also said that the volume of property sales in April shrunk by 10 per cent compared to the previous year - the first contraction in eight months.

S&P forecasts a 10 per cent correction in property prices among rated developers in the next 12 months.

In the event of a 20 or 30 per cent correction, this could be bad for a number of highly leveraged developers - leaving them unable to meet debt payments.

The rating agency last month lowered its long term corporate ratings for Renhe Commercial Holdings to BB-minus from BB and Kaisa Group Holdings to B-plus from BB-minus.