The extent of China’s real estate crisis has been laid bare by a leading ratings agency, which has made a startling estimation of how many developers are now unable to pay their debts.
“Based on our sensitivity tests, at least one-fifth of rated Chinese developers could be insolvent,” said S&P Global Ratings’ China Country Specialist Chang Li.
“This assumes no refinancing, and that all pre-sold obligations are completed.”
‘Time is running out’
Many developers, including embattled giant China Evergrande, have been accused of kicking the can down the road by asking investors to exchange or extend defaulted bonds, but S&P believes time could be running out.
“The forbearance investors have shown on China developers’ exchange and extension offers may not continue,” Li said.
“In the next stage, we assume investors will lose patience for such deferrals, especially if home sales do not soon recover. S&P Global Ratings believes that developers’ liquidity risk will evolve into insolvency risk if the sales recovery stalls.
“We assume debt extensions only serve to buy time, and do not fundamentally resolve developers’ excess leverage.”
What’s at stake?
S&P says US$88 billion in distressed bonds issued by Chinese developers are now at risk.
“The entities have over the past 12 months completed exchanges or extensions on about US$27.8 billion for distressed bonds,” Li said.
“This was a useful step while creditors took a moment to assess a fast-breaking downturn in China property, and were reluctant to push a swath of firms immediately into restructuring.
“If a sales turnaround is not forthcoming, investors will reject repeated extensions, and will be more likely to press their claims through a holistic restructuring or an in-court resolution.
“We saw an indication of this in investors’ recent rejection of a request for an extension on an Evergrande bond.”
Evergrande continues to struggle through its debt crisis, with some of its major suppliers recently announcing they will suspend loans and stop work in a move that could signal trouble for the global economy.