Moody’s Withdraws China Vanke Issuer Rating, Assigns Junk-Level Corporate Score

Moody’s Investors Service has withdrawn its issuer rating for China Vanke, assigned a speculative-grade rating to the state-backed builder’s corporate family and downgraded Vanke bonds further into junk territory.

The rating actions reflect the view that Vanke’s credit metrics, financial flexibility and liquidity buffer will weaken in the next 12-18 months because of declining contracted sales and rising uncertainties over access to funding, said Kaven Tsang, a Moody’s senior vice president.

The Shenzhen-based group’s continued exposure to funding volatility, coupled with high refinancing needs, does not support an investment-grade rating, according to the agency, which put all of Vanke’s ratings on review for downgrade after a previous negative outlook.

“The review for downgrade reflects our concern over the company’s ability to recover its sales and improve its access to funding, as well as maintain an adequate liquidity buffer for its ongoing refinancing needs,” Tsang said in a release.

Sales Plunge Clouds Outlook

Moody’s on Monday issued a corporate family rating of Ba1 for Vanke, placing the group chaired by Yu Liang one level below investment grade, and lowered Vanke’s senior unsecured bond ratings by one notch to Ba2.

The agency estimates that Vanke’s contracted sales plunged 40 percent year-on-year to RMB 34.5 billion ($4.8 billion) in the first two months of 2024, after falling 10 percent in 2023 to RMB 376 billion — a figure still high enough to make the company China’s second-biggest developer by sales, trailing only state-owned Poly Real Estate.

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

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 the agency.

“Its use of internal resources to repay these maturing debts will weaken its liquidity buffer,” Moody’s said.

China South City Debt Talks

Also Monday, Vanke’s fellow Shenzhen developer China South City Holdings announced that it has held discussions on debt management strategies with creditors and the holders of bonds on which it has defaulted or cross-defaulted. China South City will give an update to the market when appropriate, the company said in a filing with the Hong Kong stock exchange.

China South City last month missed payments on offshore bonds due in April of this year, bringing its aggregate defaulted principal to more than $3.2 billion.

Reuters reported on 23 February that a group of China South City’s offshore creditors planned to file a lawsuit against Shenzhen SEZ Construction and Development Group, seeking to recover payments from the developer’s biggest state-owned shareholder under the bonds’ keepwell provision. Keepwell is an informal guarantee that a parent company will support its subsidiary’s debt obligations.

The suit would be the first filed against a state-backed developer for recovery of payments owed to creditors under the keepwell provision since China’s property crisis began, Reuters said.