Moody's downgrades China Vanke's credit rating to “junk” status
Moody has now downgraded Vanke's credit rating from "investment grade" to "junk," giving it a Ba1 rating.
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The backstory: China's property scene has been on rocky ground since 2021. This is a big deal because this sector contributes a big chunk to its GDP (estimated at 17-29%). In the first major incident, Evergrande, a heavyweight in the industry, stumbled into a mountain of debt, causing a ripple effect of defaults. This sent shockwaves through the entire sector, impacting other property giants like Country Garden. So, China has been taking steps to soften the blow and boost the sector. For example, the People's Bank of China recently slashed a key mortgage reference rate to boost the property market.
China Vanke is one of China's largest real estate developers and has been around since 1984. It's backed by the government, with about 30% of it owned by Shenzhen Metro, which answers to the state asset regulator in Shenzhen. The company made history with its initial public offering (IPO) back in 1991, becoming the first property firm to be listed on the mainland stock market. It was a big win, setting the developer up as a major player.
More recently: Vanke has hit a rough patch. Its sales stumbled last year, down by 10% to 376.12 billion yuan (US$52.4 billion). Then, January 2024 hit even harder, with a 32% drop. This worried people about Vanke's money situation, causing a rush to sell its stocks. The price of Vanke's shares on the Hong Kong stock exchange went down a lot, from once trading over HK$30 to about HK$6 now. To ease investor nerves, Vanke recently said it had deposited funds to repay US$630 million of US dollar notes due last Monday.
The development: Moody has now downgraded Vanke's credit rating from "investment grade" to "junk," giving it a Ba1 rating. That means it needs to offer a higher yield on its bonds to make up for its greater risk of payment default. The agency also put all of Vanke's ratings under review for possible further downgrade. But other major rating agencies like S&P and Fitch are keeping Vanke's investment grade ratings intact. Kaven Tsang from Moody's expects Vanke's financial performance to worsen in the next 12 to 18 months due to falling sales and funding uncertainties amid China's property market issues.
But Vanke's not hitting the panic button just yet. The company stated that it believes the impact of the Moody's downgrade on its financing activities is manageable. On Tuesday, Chinese state media also reported that 12 major banks were in talks to offer a syndicated loan for Vanke worth as much as 80 billion yuan (US$11.2 billion) so it can make its upcoming payments.
Key comments:
"The rating actions reflect Moody's expectation that China Vanke's credit metrics, financial flexibility and liquidity buffer will weaken over the next 12 to 18 months because of its declining contracted sales and the rising uncertainties over its access to funding amid the prolonged property market downturn in China," Kaven Tsang, a senior vice president at Moody's said in a press release.
"For real estate companies that are seriously insolvent and have lost their operating capabilities, [we should] let them go bankrupt or be restructured," said Ni Hong, China's housing minister last week.
"The rating review only impacts its offshore financing activities which has been shut for a while now," said KT Capital senior researcher Fern Wang. "The market has relatively muted responses to the potential action as the Vanke bonds have been traded as a junk bond for a while now."
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