Fitch Downgrades China Vanke Despite Funding Push by State Banks

Fitch has downgraded key credit ratings for China Vanke and given a negative outlook to the state-backed builder, even as mainland banks deliver a raft of funding to shore up the troubled giant’s finances.

The downgrade of Vanke’s long-term foreign and local currency issuer default ratings, from BB+ to BB-, reflects a reduction in the developer’s liquidity buffer after a weaker-than-expected sales performance in the year to date, the agency said Thursday in a release.

The further plunge through junk territory marks Fitch’s third downgrade of Vanke in less than eight months, and it comes despite a nearly RMB 28 billion ($3.9 billion) lifeline extended to China’s second-biggest developer by sales by various lenders this month, according to data compiled by Bloomberg.

“Fitch believes the sustained sales deterioration has affected China Vanke’s non-bank funding access, and the company will increasingly rely on its cash on hand, asset disposals and secured onshore bank financing to address its sizable debt maturities in 2024 and 2025,” the agency said.

Failure to Stabilise

The negative outlook reflects the risks of Vanke’s and the broader real estate industry’s sales failing to stabilise in spite of intensifying government policy support, Fitch said.

The agency estimates that the group chaired by Yu Liang has sufficient unencumbered development properties in Tier 1 and Tier 2 cities to support secured funding access, though the transition from unsecured to secured borrowings may constrain the company’s long-term financial flexibility.

Vanke’s contracted sales in the first four months of 2024 totalled RMB 78.9 billion, down 42 percent from year-earlier levels. Fitch noted that potential asset disposals — the developer is marketing an unfinished company headquarters project in Shenzhen for more than $300 million — could boost liquidity and aid repayment of large capital-market debt maturities in 2025.

“Fitch believes a stabilisation in Vanke’s sales and cash generation is crucial to support the company’s ratings,” it said.

Maturity Wall Looms

Fitch’s action comes after Moody’s Investors Service withdrew its issuer rating for Vanke and assigned a speculative-grade rating to the builder’s corporate family.

Vanke has RMB 14 billion ($2 billion) in offshore bonds and RMB 20 billion in onshore bonds coming due or becoming puttable through June 2025, according to Moody’s.

“China Vanke’s falling sales will undermine its revenue recognition and operating cash flow generation over the next 12-18 months,” Moody’s said in March. “The company would also have to offer discounts on certain projects to strengthen its sales in the downcycle, which will weaken its profit margin.”