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Research Report

19/10/2020 17:23

New debt-control measures improve developers' credit quality

[ET Net News Agency, 19 October 2020] China's new measures to control debt growth, if
implemented, will improve property developers' credit quality over the next 2-3 years by
limiting the use of debt to fund business growth, which will effectively put a lid on
highly geared developers' leverage buildup, according to a new report by Moody's Investors
Service.
"That said, the measures specifically target raising new debt and therefore should not
affect developers' ability to raise debt for refinancing," said Kaven Tsang, a Moody's
Senior Vice President.
"And while developers with high leverage will be restricted from debt-led growth,
financially healthy developers with low leverage and strong liquidity will still have
flexibility to raise debt to fund growth, allowing them to acquire market share from their
weaker peers," added Tsang.
According to media reports, developers will be tested on three financial parameters:
liability to asset ratio (debt leverage); net debt to equity ratio (capital structure);
and cash to short-term debt ratio (liquidity). Their ability to raise new debt will be
dependent on the result of the test.
Developers' annual debt growth would be limited to a maximum of 15% if they do not
breach any parameter. A breach of one parameter would result in a reduction of the growth
rate by 5 percentage points.
Per Moody's test scenarios, most rated developers will continue to be able to raise new
debt, albeit at a slower pace. Rated developers should have the flexibility to grow their
debt by 5%-10% in the next 12 months under the strict scenario if the new policy has
strict limits, or by 15% if the guidelines are looser.
Nevertheless, Moody's expects rated developers' reported debt growth will slow to 5%-10%
in 2021, down from the 15%-25% growth in 2018 and 2019. This forecast mainly comes with
the acknowledgment that economic recovery is tenuous and property sales growth will remain
modest over the next 12-18 months. (KL)

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