Coronavirus raises threat of China developer defaults

China’s weakest property developers risk defaulting on their US dollar bonds, as home sales suffer and access to cash dries up due to the coronavirus outbreak.

Defaults on dollar bonds by Chinese issuers are rare and missed payments by developers have been almost non-existent in recent years, even as overall corporate defaults in the country hit a record high in 2019. 

But the rapid spread of coronavirus that originated in central China has raised the chance of property defaults this year — an event that would send shockwaves through the market — as several midsized groups cash flows’ are squeezed while being shut out of the market to refinance existing debts.

Developers must pay about $20bn in maturing US dollar bonds this year, according to data from Dealogic. They raised a record $22bn in the first two months of the year, topping the previous high in 2019 when developers more than doubled US dollar issuance.

The total market for US dollar bonds issued by Chinese developers, via offshore financial centres like Hong Kong, is much larger. S&P alone rates about $185bn of such debt, some of which is held by international investors.

“The only way to survive is to have a lot of cash on hand right now,” said Cheong Yin Chin, a senior China property analyst at CreditSights in Singapore.

Facing the greatest default risk this year is Tahoe Group, a Fujian province-based company that builds houses across China. The mid-tier group went on an acquisition binge in 2016, buying Hong Kong insurer Dah Sing Life for $1.4bn in 2016, but has faced cash flow issues ever since.

Tahoe has about $730m in US dollar bonds maturing over the next 12 months but it has not told investors how it plans to repay them. A $530m bond maturing in January next year has been distressed since 2018 but plummeted to new lows last month and now trades at 73 cents on the dollar.

“There’s a list of names that are in a bad situation this year [due to the outbreak],” said an investor who looks for distressed property deals. The person noted that Tahoe was among those that could be forced to sell off assets at highly discounted rates.

Tahoe did not respond to a request for comment.

Hong Kong-listed Sunshine 100 is another developer that is struggling to pay back US dollar debts due this year. The group has refinanced some of its debts but analysts fear that will be insufficient to repay a $400m bond due in September.

“It has bought some time but if the virus situation continues like this Sunshine will not be in good shape,” Ms Cheong of CreditSights noted.

China Yida, Guorui Properties and Guangzhou R&F are facing similar problems but have worked out some refinancing options.

The Covid-19 epidemic has shut down economic activity across large swaths of China, with tens of millions of people unable to move freely in towns and cities. In many places that means potential homebuyers cannot go out and search for new flats.

While sales figures for February are not yet available, a report from property researcher E-House showed that during the first week of February fewer than four homes a day were sold in Beijing. Normally, hundreds of homes change hands each day.

The crisis has caused big problems for developers, many of which are highly indebted and need cash flows from property sales to pay debts.

“Default risk is definitely higher now given the virus outbreak,” Christopher Yip, a director at S&P Global Ratings, said of property developers’ debt.

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