Vanke Bonds Volatility Underscores China Property Debt Contagion
Published 13 November 2023, 21:00:00.7 GMT
By Xinyi Luo
(Bloomberg) -- China Vanke Co.’s recent scramble encapsulates Chinese property debt investors’ fickle sentiment as they try to decode hazy government reassurances amid the industry’s freefall.
Investors of Vanke — considered one of the more fiscally prudent Chinese developers — began dumping its bonds at a rapid clip in late October, unsure how long its liquidity can be sustained. The selloff turned the developer into Asia’s worst investment-grade performer for the month.
Vanke said its operations are normal. The state-owned company that controls Vanke subsequently expressed confidence in Vanke’s ability to repay debt and pledged financial help if needed.
Their efforts have helped its bond prices recover. Drama, though, is hardly over. Market sentiment remains sour after two of China’s once-largest developers defaulted. Apartment sales continue to lag, and Chinese developers’ access to offshore borrowing remains all but shut.
Meanwhile, all of Vanke’s longer-term notes are trading below 80 cents on the dollar, a level generally considered distressed.
What’s the company?
Shenzhen-based Vanke, founded by Wang Shi in 1984, was China’s largest property developer for years before more aggressive peers Country Garden Holdings Co. and China Evergrande Group topped it.
Vanke is currently China’s second-biggest developer by sales, after other previously larger peers have fallen into default. It has expanded to over 60 cities across Mainland China, targeting the country’s vast middle class, and to overseas markets. Vanke has amassed 1.28 trillion yuan ($176 billion) of total liabilities, taking on debt-dependent strategies common in the industry.
Worried about the industry’s debt bubble, Vanke has diversified by expanding into other areas, including property rental services, logistics and investment.
Unlike some other developers, Vanke has been partly state-owned for much of its existence. State-owned conglomerate China Resources (Holdings) Co. was its largest stakeholder for almost two decades.
In 2017, Shenzhen Metro Group Co., a rail freight operator owned by the city’s state-owned assets supervisor, bought a controlling stake. Wang then stepped down as Vanke’s chairman.
What’s happening?
Selling in Vanke dollar bonds accelerated in late October as Evergrande and Country Garden’s woes helped spread market skittishness to even peers with higher-rated notes.
Vanke’s third quarter results that followed a few days later did little to ease angst. Its quarterly revenue had fallen 32% on-year due to sluggish sales.
Vanke securities in a Bloomberg index of Asia investment-grade dollar notes lost 35% for all of October, the most in a year, Bloomberg-compiled data show. The company attributed the bond price fluctuation simply to market sentiment. It said it has enough cash — 103.7 billion yuan as of the end of the third quarter, or 2.2 times its short-term borrowings.
Chinese authorities stepped in as well. Shenzhen’s State-Owned Assets Supervision and Management Commission sought to reassure investors in a call in early November, saying it has confidence in Vanke and enough cash to support the builder, if needed. Shenzhen Metro said it has no plans to cut its stake. A day later, Vanke’s notes climbed higher.
The People’s Bank of China also huddled with regulators and executives from the builder industry, including Vanke, at a seminar to discuss financing needs, local media outlet Cailian reported.
By Nov. 10, Vanke’s notes in a Bloomberg index of Asia investment-grade dollar bonds returned 34% for the month.
Why does it matter?
Vanke, one of the few investment-grade developers in China, has three notes coming due next year in March, May and June. If the company were to miss a payment on any of them, that would make it a third industry giant to default. And it would send the clearest signal yet that the end of the property market meltdown is nowhere in sight.
Bond investors had relied on conventional wisdom that notes issued by state-linked developers are safer bets than wholly private sector issues.
A recent payment extension request by partially state-owned Greenland Holdings Corp. weakened that notion. A Vanke default would dim it further.
What does the company say?
Vanke didn’t reply to a request for comment. The developer pledged in an earlier filing that it “will definitely repay offshore and onshore debt on time.”
“The market doesn’t need to worry about that at all,” it said.
The company also told investors it plans to use cash on hand and funds drawn down from overseas loans to repay its offshore bonds that mature in 2024.
Two dollar notes due 2024 with a combined $1.2 billion of principal are both trading over 90 cents, according to data compiled by Bloomberg. That may indicate market expectations that the builder will pay the bonds on time.
What do analysts and the ratings firms say?
Recent Vanke developments have drawn mixed reviews from analysts.
The company’s fundamentals are strong, but its access to financing may be more fragile among investment-grade developers because it’s not considered a core state-owned enterprise, said Leonard Law, senior credit analyst with Lucror Analytics Pte.
“Hence, its bond prices would be sensitive to negative news, particularly in relation to any deterioration in financing,” he said.
Willem Glorie, portfolio manager at LGT Capital Partners Asia-Pacific Ltd., continues to believe that Vanke — and a few others, such as China Jinmao Holdings Group Ltd. and Longfor Group Holdings Ltd. — “can make it through the challenging environment.”
A decisive turnaround still depends on a sales recovery, more stimulus or better funding access, he said.
Even before the selloff, Fitch Ratings Inc. had downgraded Vanke’s long-term issuer default rating to BBB from BBB+.
In September, Moody’s placed the company on watch negative from outlook stable. The downgrade “reflects high uncertainties over the company’s ability to recover its weakened contracted sales and credit metrics,” Kaven Tsang, a Moody’s Senior Vice President, said.
What are traders watching for next?
Whether Vanke can repay its notes coming due before the year-end will be closely watched as an early gauge of what’s to come next year.
Vanke now has $103.6 million of onshore and offshore bonds and interest that need to be paid before the year-end, according to Bloomberg-compiled data. That includes a 3.5%, 381 million yuan bond that the company said would be repaid with transferred funds.
The company faces a total of more than $2.6 billion of debt that will have to be paid back in 2024, and the pressure that comes with the obligation.
Its liquidity is considered adequate when compared to other peers. But traders will still keep a close tab on its property sales amid the volatile market, especially given its exposure to non-core cities.
--With assistance from Shuiyu Jing and Emma Dong