Chinese Property Developers Caught in Negative Credit Loop Says Moody’s

Property developers’ funding access will remain constrained in 2022. Offshore corporate bond defaults rose 28 per cent in first three quarters of 2021 and corporate bond defaults in China are expected to continue to rise in 2022 according to Moody’s Investors Service. Highly indebted property developers and enterprises owned by regional and local governments struggle to access new funding after a multi-year borrowing spree.

Over the next four quarters, about 8.7 trillion yuan of onshore corporate debt is set to mature, with 18 per cent held by “comparatively weak” companies, according to Moody’s.

Property developers, such as China Evergrande Group and Kaisa Group, have faced liquidity crunches in recent months. Onshore defaults by Chinese non-financial companies rose by 19 per cent to 98.7 billion yuan (US$15.5 billion) in the first three quarters of this year, while offshore defaults rose 28 per cent to US$7.8 billion this year.

“These financially weak bond issuers raised large amounts of debt during the past several years, when investors were willing to take on risk in exchange for comparatively high yield,” Moody’s analysts Ivan Chung and Jessie Tung said in a new research report. “But regulatory tightening during the past 12 months aimed at controlling these companies’ leverage growth is limiting their access to funding and driving heightened credit differentiation by banks and investors.”

The defaults reflect tightened funding access and increased risk aversion by investors, according to the credit ratings agency. The amount of offshore defaults in the first nine months of this year exceeded the entirety of 2020.

Defaults are likely to continue to rise next year, but the number and value of such defaults will remain a small portion of the total Chinese onshore and offshore bond markets, according to Moody’s.

“Chinese property developers’ access to onshore bank and trust loans, and onshore and offshore bond markets has tightened and will remain tight during the coming six to 12 months,” Moody’s said. “The constrained access is reducing developers’ ability to raise new debt. The tightness also reflects heightened investor risk aversion to property developers.”

On Tuesday, S&P Global Ratings downgraded China Aoyuan Group to a “CCC” rating from “B”. The note said the developer may not have sufficient access to existing cash for debt repayment and faces a “high non-payment risk” if its alternative fundraising plans do not materialize in time.

Source: Moody’s

From The TradersCommunity Research Desk