Moody’s says China’s defaulting property firms are making slow progress with debt restructuring, will struggle to stay afloat

Property developers that have defaulted since mid-2021 have made little progress in restructuring their debt in the past 12 to 18 months, Moody’s analysts say
Bondholders could suffer from more losses while waiting for developers to put together a restructuring plan

China property

Elise Makin Beijing

Published: 8:30am, 29 Jun 2023

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Chinese developers are making slow progress with their debt restructuring and the chances of them getting back on track are slim, Moody’s said in a report on Wednesday.

China Evergrande Group and Cifi Holdings, for instance, are still in talks with offshore creditors about their debt restructuring plans, the rating agency said. Fantasia Holdings Group and Sunac China, meanwhile, have received support from bondholders for 76 per cent and 85 per cent of their offshore debt, respectively, but neither have complete backing.

“Property developers that have defaulted since the sector downturn in mid-2021 have made little progress in restructuring their debt in the past 12 to 18 months,” Moody’s analysts led by Alfred Hui said in the note. They estimate that less than 20 per cent of developers that have defaulted on offshore bonds since 2021 have announced debt restructuring plans.

“We expect the recovery rates of most defaulted developers’ offshore bonds to be low because of a decline in property values and the defaulted developers’ high leverage,” they added.

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The analysts also said bondholders could suffer from more losses while waiting for developers to put together a plan, as the asset values of these firms might continue to erode over time.

“The losses, depending on the terms of the plans, can take the form of principal haircuts, payment-in-kind for coupons, maturity extensions or equity swaps,” they said. “All of these erode the economic value of their original investments.”

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And even if debt-laden developers are able to put together a plan and move forward with it, Moody’s expects they will still face challenges in staying afloat in the future as they will find accessing new financing difficult and will need to pay elevated funding costs for new financing.

Beijing’s rescue package for alleviating developers’ liquidity crunch has offered selective help so far. Onshore banks have been reluctant to extend credit to defaulting developers and prefer state-owned builders and private players without any default history.

A weak recovery in contracted sales, crucial for generating sustainable cash flows for future debt servicing, is also adding to the woes of defaulting developers. Homebuyers are avoiding these builders due to concerns about project completion.

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“Defaulted developers may also lack collateral for bank loans,” said Moody’s, adding that asset management companies also do not have much flexibility to provide project financing to defaulting developers, as they already have high credit risk exposure to the property sector.

“The constrained access to new funding will continue to weigh on defaulted developers’ ongoing operations and efforts to invest and switch into alternate business models,” the analysts said.

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