Moody’s Cuts China Vanke Debt to Junk as Issuer Rating Teeters

Moody’s Investors Service has downgraded China Vanke’s senior unsecured bonds and medium-term note programme to junk status, citing sales declines and uncertainty over the state-backed developer’s access to funding.

In an action last Friday, Moody’s slashed the ratings for the senior bonds and the $9.5 billion MTN programme by two grades, from Baa2 to Ba1. The agency also lowered Vanke’s issuer rating by two notches, from Baa1 to Baa3, putting the Hong Kong-listed group just one rung above speculative grade.

Vanke and its debt issues received negative outlooks from Moody’s amid doubts about the Shenzhen-based builder’s ability to improve operating performance and recover access to funds amid challenging industry prospects and an unstable funding environment.

“The downgrades reflect China Vanke’s weakening contracted sales, which underperformed the broader market in the first 10 months of the year, and our expectation that the company’s credit metrics and liquidity buffer will weaken over the next 12-18 months,” said Kaven Tsang, a Moody’s senior vice president.

Bleak Sales Forecast

Vanke reported contracted sales for the January-October period of RMB 312.4 billion ($44 billion), down 10 percent on the same period a year earlier. Moody’s sees a further 10 percent drop in 2024.

Vanke’s tenuous investment-grade issuer rating reflects the developer’s scale and brand identity in China, its disciplined approach towards financial management and its links to the Shenzhen government, Moody’s said. The agency expects Vanke’s RMB 101 billion in unrestricted cash and its projected operating cash flow to cover committed land payments and refinancing needs over the next year and a half.

The Shenzhen government said earlier this month that it stood ready to buy some of Vanke’s urban renewal projects for more than RMB 10 billion to help boost liquidity. Vanke also anticipates raising RMB 4 billion from the mainland listing of its mall REIT, which last week received registration approval from the nation’s securities regulator.

In a report released Monday, Fitch Ratings forecast a zero to 5 percent decline in China developers’ contracted sales during 2024, implying full-year sales of RMB 10 trillion to RMB 10.5 trillion. Fitch expects the operating environment to remain challenging but gradually stabilise in higher-tier cities, with state-backed builders’ stronger market positions becoming more entrenched.

Sunac Swaps Equity

For troubled developers seeking a path back to solvency, Sunac China Holdings’ $10.2 billion offshore debt restructuring provides a template, according to a research note issued Tuesday by S&P Global Ratings.

“Other defaulted developers will not be able to exactly replicate the specifics of this deal, but Sunac’s success offers some key lessons,” said S&P analyst Esther Liu.

Rather than relying heavily on bond extensions, the restructuring includes a significant equity component, with a debt-to-equity swap that could cut Sunac’s debt by as much as $4.5 billion and give the firm breathing space to focus on operations and revenue, according to S&P.

“Simply, the terms put Sunac on path to a reset, letting it become a developer again,” Liu said.