S&P sees more defaults likely as Chinese developers 'deteriorate'

With Shenzhen-based Kaisa teetering on the verge of default, ratings agency Standard & Poor's has warned that other mainland property developers may default this year.

"The earnings and profitability of some Chinese property developers could deteriorate further in 2015, and more defaults cannot be ruled out," S&P said. "The annual results for 2014 indicate many developers are in significantly worse shape than in the previous year. Their profitability generally took a substantial blow.

"We expect developers with operations in smaller cities to face more difficultly in destocking and improving profitability this year. Sales in these cities have not picked up markedly despite price cuts owing to severe competition and a pile-up of inventory."

S&P said more price corrections in the mainland real estate market were likely, as developers sought to clear inventory after lukewarm sales in the first quarter of this year.

"The slack operating performance in recent months has weakened the credit profiles of many Chinese developers," S&P credit analyst Christopher Yip said. "Continuing slower sales growth and swelling leverage could lead to further negative rating actions over the next 12 months.

"Liquidity remains a key risk for Chinese developers, and has worsened for a number of already-weak companies. Lower cash balances paired with increased short-term maturities have heightened refinancing risks, particularly for developers carrying high-cost alternative financing."