China Vanke’s Dollar Bonds Signal Fears of Default Down the Road

Published 13 March 2024, 23:00:00.0 GMT
By Bloomberg News

(Bloomberg) -- Cash-strapped Chinese developer China Vanke Co. has been fighting to avoid its first-ever default, and while investors’ fears of an imminent meltdown appear to be easing, its long-term prospects are less clear.

Vanke, the country’s second-largest developer by sales with 1.28 trillion yuan ($178 billion) in total liabilities, has a series of bonds maturing this year, including a $600 million note due in June. For now, the short-dated notes are trading near par, indicating little concern of an immediate implosion.

Its longer-dated dollar bonds are another story. One note, due 2029, at one point this month fell to as low as 40 cents on the dollar, indicating investors’ worries over the company’s long-term financial health, despite its strong links to the government. 

There is “better clarity for Vanke to repay its short-dated bonds based on our assessment of its latest liquidity profile,” said Fiona Kwok, an Asia fixed-income portfolio manager at First Sentier Investors (Hong Kong) Ltd. “For longer-dated bonds, their performance will be dependent on industry recovery and strength of support from Chinese government.”

Vanke, whose major shareholder is a state-owned firm based in Shenzhen, has been seen as a bellwether for government support of major developers. The company received rare backing from local regulators and officials last year following a drop in its bond prices over worries about the nation’s ailing property sector. The company had a total land bank of 107.7 million square meters in gross floor area as of June, according to its interim report.

Falling sales and margins amid the property sector’s decline are likely to limit Vanke’s liquidity, raising concerns about its long-dated notes, said Leonard Law, senior credit analyst at Lucror Analytics. A fully market oriented approach “may be insufficient to save Vanke from defaulting over the longer term,” he said.

Earlier this week, Moody’s Ratings stripped Vanke of its investment-grade credit rating and warned of potential further cuts. The firm still carries non-junk grades at S&P Global Ratings and Fitch Ratings. If either drops Vanke below investment grade, the builder will become what is known as a “fallen angel” and could prompt investors of high-grade bonds to sell their Vanke holdings.

Despite that, signs are growing that Beijing doesn’t intend to let Vanke default. The developer is in state-coordinated talks with banks on a debt swap and its major creditor banks are said to be considering a plan to swap bond holdings worth tens of billions of yuan in principal into secured debt, Bloomberg reported.

Vanke has more than $10 billion of bonds outstanding as of Wednesday, according to Bloomberg-compiled data. About $1.8 billion of those are maturing or facing early redemption options this year, according to a Bloomberg calculation.

--With assistance from Yasufumi Saito.