The liquidity profiles of China’s property developers deteriorated during the first half of 2012 and, given the subdued state of the property market on the mainland and the government’s continued tight stance on credit for the sector, any improvement is unlikely for the rest of the year.
According to the results of a stress test we conducted on May 16, weak liquidity now characterises 11 of the 29 property developers rated by Moody’s, compared to only four in our earlier test in December 2011.
The deterioration stems specifically from higher levels of short-term debt and lower-than-expected cash balances for end-2011 against the backdrop of slowing sales and rising inventories.
Total short-term debt due for repayment this year by our 29 rated developers now amounts to Rmb159 billion, up 23% from our stress test report in December 2011. We had based the last estimate in December on the 12-month maturing debt of Rmb130 billion that the developers had reported in their published financial statements for the first half of 2011. The Rmb159 billion, which is based on updated reports, breaks down into Rmb128 billion of onshore debt and Rmb31 billion of offshore debt.
Figure 1: Total amount of maturing short-term debt of Moody’s 29 rated developers
Adding to the problem is the consideration that the average ratio of cash to short-term debt for our 29 rated developers could fall below 1x in 2012, after declining to 1.1x in December 2011 and from 2x in December 2010. The 1x ratio is important as an indicator of financial flexibility, as was evident during the slump of 2008.
Cash-coverage positions have been declining due to both weak sales and more spending on construction in second-tier and third-tier cities. Because of restrictions on purchases in first-tier cities, many developers decided to enhance their geographic diversity, but this approach has encountered problems because the slower pace of growth in sales has also hit second-tier cities.
Figure 2: Aggregate cash and 12-month maturing debt of 29 rated developers
Furthermore, the negative outlook we first assigned to China’s property sector in April 2011 remains in effect because we anticipate a continued weakening in the sector’s fundamentals over the next 12 months, further pressuring cash flows and balance-sheet liquidity.
In this environment, rising refinancing risk appears to be greatest among lower-rated developers. Such risk has risen due to weak fundamentals and continued tight credit, although there are differences in the level of risk for individual issuers and across rating categories. The clearest divergence occurs between the prospects for developers rated single B or lower and for developers rated Ba or higher. Some of the latter have backgrounds as state-owned-enterprises (SOEs).
Although all of the 11 with weak liquidity face challenges, we see four of this group — Coastal Greenland (Caa1/Negative), Hopson Development (Caa1/Negative), Greentown (Caa1/Negative) and Shanghai Zendai (Caa1/Negative) — as being at most risk of a debt restructuring or distressed debt exchange.
Indeed, Coastal Greenland, Shanghai Zendai and Greentown have started selling assets to raise funds. Timely asset sales by Shanghai Zendai would help resolve its squeezed liquidity, but Greentown’s large short-term debt of Rmb20 billion (US$3.2 billion) requires more disposals. Likewise, Coastal Greenland’s plans to raise funds by selling some assets do not appear to be enough to cover its total maturing debt.
The four next most vulnerable appear to be Powerlong (B3/Negative), SRE Group (B3/Negative), Renhe (B3/Negative) and Glorious (B3/Negative), given their weak sales performances, or weaknesses in financial management. These developers also have low levels of offshore debt maturing between now and end-2012.
The remaining three with weakest liquidity under our stress test — Yanlord (Ba3/Negative), Zhong An (B1/Negative) and Shanghai Industrial Urban Development (B1/Stable) — are better positioned to withstand this risk due to strong backing from their parent companies, relatively good track records in refinancing debt or lower refinancing requirements.
Figure 3: Stress test scores as of May 16, 2012
Explaining the stress test
In our stress test on May 16, we forecast the liquidity positions of our 29 rated developers based on their reported figures at end-December 2011. We used a reasonable set of adverse assumptions and based these on an approach we have been using regularly, with adjustments for market conditions, since April 2008.
Our stress criteria do not represent a prediction of the future. Using a common framework for stress criteria facilitates comparative estimates of the liquidity profiles of issuers in the sector.
Our characterisation of liquidity for each company is an estimate that is formed using recent financial information and a set of broad assumptions. In this most recent stress test, we determined that 11 of our 29 rated developers were most vulnerable in terms of liquidity. The 11 all scored below 1x in their forecast ratios of cash holdings and sale receipts to short-term debt, interest and land and construction expenses.
As mentioned, this figure of 11 issuers at risk has risen from four in our last stress test of December 2011. Two reasons account for the rise: lower-than-expected cash balances for end-2011 and increased levels of short-term debt due in 2012.
About the authors
Peter Choy is an associate managing director at Moody’s Investors Service and Kaven Tsang is an assistant vice president - analyst. Both are based in Hong Kong.