[ET Net News Agency, 23 April 2018] After two years of record sales and rising margins,
most rated Chinese developers have the cash at hand to facilitate project execution even
if funding markets tighten, That's according to article published today by S&P Global
Ratings titled, "China's Developers Strengthen Defenses For A Funding Crunch."
However, those who didn't build sufficient buffers in the upcycle could face rapidly
deteriorating credit profiles in a downturn, the credit rating agency added.
"We expect outperformance from Chinese developers that do not have to wade too deeply
into rising funding markets to finance sales execution and land acquisitions," said S&P
Global Ratings analyst Cindy Huang.
Meanwhile, refinancing risks are mounting against looming large debt maturities.
Short-term debt of the developers we rate in China increased 25% in 2017, and short-term
debt as a share of total debt is at its highest point since 2012.
S&P's analysis shows that onshore average coupon rates have increased close to 200 basis
points (bps) since 2016, and this is just for the bigger players. The increase would be
even higher for smaller developers.
Moreover, with authorities closing off access to alternative funding channels such as
trust loans, issuance on offshore markets is soaring. However, international investors are
demanding much-higher coupons for smaller developers.
Besides tighter funding conditions, real estate companies are contending with
restrictive policies to curb property price appreciation, and intensifying competition.
Restrictive policies are likely to remain tight over the next 12 months. Price controls in
key cities have significantly reduced expected gains on projects. Lengthy delays in
project launches may result if developers are unwilling to compromise on prices.
S&P expects 2018 may be a turning point for pre-sale margins to start contracting.
Credit divergence is inevitable, with the next 12 months being a testing time for
developers to prove their sales execution and cash collection in challenging tougher
environment.
Rated developers' cash holdings have risen markedly in recent years, a sign that many
prepared for a potential funding crunch. Since 2015, cash growth has exceeded total-debt
growth, and the ratio of cash to total debt rose to nearly 50% at the end of 2017.
"Companies that have not built sufficient financial buffers in the past two thriving
years may see their credit profiles deteriorate the most during this late stage of the
growth cycle," said Huang. (KL)