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Pandemic exposes lower-rated Asian property companies to higher default risk

Default risk is rising for Asia-Pacific property companies rated below investment grade, due to reduced funding options and higher refinancing costs as the coronavirus outbreak further weakens their credit metrics, analysts say.

However, for most other developers in the region, their default risk remains relatively low. Analysts say many of them have reasonably sufficient reserves of cash and undrawn bank loans to meet their debt obligations. They have also retained income from previous good years as earnings buffer during downturn, as well as a broad base of recurring revenue from investment properties.

From Jan. 1 to April 20, S&P Global Ratings lowered or reviewed the long-term credit ratings or outlook of 21 property developers in Asia. Of the companies analyzed, 11 received a rating below the BBB- investment-grade level. During the same period, Moody's downgraded or reviewed the ratings or outlook of 30 developers, 17 of which are rated below Baa3, or the so-called high-yield issuers.

"A key differentiating factor between the companies will be the length of runway each has to weather this period of uncertainty," says Jacintha Poh, Moody's vice president and senior credit officer.

Most of these high-yield developers are based in mainland China, with a handful others in Indonesia. Some of the Chinese developers have been borrowing aggressively, both offshore and onshore, to raise funds for land purchases in recent years. Unfortunately, this funding habit exposes these developers to the risk of a liquidity crunch as the outbreak affects property sales, thus limiting the companies' capability to offer high enough yields that could reach as high as 12%.

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Funding challenges for some

Lower ratings might further reduce funding options available to developers as shifting investor sentiment may "cause spreads to widen and access to funding to be more limited," Ratings reported April 22.

Moreover, access to U.S. dollar-denominated funds may also tighten for companies based in emerging markets.

Many Chinese developers, even the investment-grade ones, have had difficulty in accessing both domestic and offshore funding due to factors including curbing measures put in place by the government.

Ratings believes that funding conditions locally have become more supportive after the government eased restrictions to help with economic recovery and to boost access to funding. Liquidity management with a focus on cash collection, actionable refinancing plans and access to onshore financing channels will continue to be critical particularly for lower-rated developers, the rating agency added.

Franco Leung, associate managing director at Moody's, said Chinese developers with ratings of B3 or below account for 5% or US$4.2 billion of onshore and offshore bonds due within the next 12 months combined. He added that these property companies might face high financing risk, especially in the offshore market.

While reduced access to these funding sources could harm some developers, Chinese companies can also turn to bank financing and trust loans, although this poses high refinancing risks particularly for weaker and smaller developers that heavily rely on these funding channels, Moody's noted April 16.

Enough cash for most

Moody's maintained that most developers in Asia have enough cash to cover a large portion of their borrowings. In particular, real estate companies in Hong Kong and in mainland China have the capability to avoid default in the repayment of debts maturing at least within the next 12 months.

Leung said high-rated Chinese developers have offshore cash and undrawn committed bank facilities that can cover roughly 82% of the debts maturing in 2020 and 61% of the bonds payable through April 2021. He added that these companies are supported by US$8.3 billion raised in the fourth quarter of 2019 and the record issuance in January of US$15.5 billion.

Many developers in China collectively have US$27 billion of U.S. dollar-denominated debt payable within 2020 as Ratings-rated property companies in the country face the maturity of US$44 billion offshore bonds in 2021. Ratings noted that a lot of these developers sold US$23 billion in offshore bonds during the first quarter, giving them enough funds to cover most of the amount payable for this year.

In the first quarter of 2020, Ratings-rated developers in China issued 69 billion yuan domestically, with another 11 billion yuan in the pipeline for April.

Recurring revenue stream

Stephanie Lau, vice president and senior analyst at Moody's, said Hong Kong-based developers will retain strong liquidity and have enough earnings buffers despite the pressure of lower earnings in 2020.

These companies generally benefit from a solid capital structure, a sizable recurring income base and uninterrupted access to funding, which are reflected in their investment-grade ratings, Lau added.

Property developers and real estate investment trusts across Asia are both expected to feel medium level of impact from the pandemic, according to Ratings.

While the coronavirus outbreak really did affect property sales, Ratings noted that most Chinese developers' financial results for 2019 show that they have been facing margin compression even before the public health crisis. The rating agency also noted that tepid sales and tighter margins will likely drive the 2020 ratings of these companies as it predicts a decline between 5% and 10% in national contracted sales for the year. Particularly in China, Ratings has been seeing better-than-expected recovery in the contracted sales of some property companies.

However, Ratings cautioned that retail landlords including Hongkong Land Holdings Ltd., Hysan Development Co. Ltd. and Swire Pacific Ltd. might face falling rental rates as social distancing measures could reduce foot traffic and spending in their malls and other retail properties.

As of April 28, US$1 was equivalent to 7.08 Chinese yuan.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings.