[ET Net News Agency, 14 June 2018] The average rating on newly rated Chinese property
developers is falling, widening the pool of 'B'-rated companies in this sector. However,
not every company for these deeply speculative-grade issuers is the same, and future
outcomes can significantly vary, according to an article S&P Global Ratings published
today, titled "As The Pool Of 'B' Rated Chinese Developers Deepens, Who Will Sink Or
Swim?"
"More 'B' rated companies are tapping the offshore bond market due to onshore funding
constraints, including a crackdown on shadow-banking activities," said S&P Global Ratings
analyst Matthew Chow.
"New Chinese property-company issuers in this market tend to have relatively shorter
operating track records, limited market shares relative to large peers, high geographic
concentration, and high leverage." he added.
Since the beginning of 2018, all six of S&P's new ratings on Chinese developers were in
the 'B' category. In 2017, seven out of eight such new ratings fell into this
speculative-grade niche.
'B'-rated companies now account for around 50% of S&P's portfolio of Chinese developers,
up from 39% at the beginning of 2017.
Under the credit rating agency's ratings definitions, 'B' issuers have the capacity to
meet their current financial commitments. However, they are more vulnerable to adverse
business, financial, or economic conditions than higher rated issuers.
"There are different routes to a 'B' rating," said Chow.
In the article, S&P Global Ratings divided its pool of 'B'-rated Chinese property
developers into four groups, based on their fundamentals and sensitivities. For example,
some companies arrived at this rating due to poor sales performance or weak business
strategies, others because of aggressive, debt-fueled expansion, and others because of
inadequate liquidity and hefty refinancing needs.
"Looking at the factors behind a rating makes it easier to determine credit trends under
various financial conditions," said Chow. "We believe developers with weak cash generation
and high short-term refinancing needs are most vulnerable to further credit tightening in
China."
Although some developers are highly leveraged, their credit trends can remain stable as
long as sales and cash generation can keep up. (KL)