Chinese government's cracking of its whip on shadow banking has dried up a major funding channel for property developers, leading to greater refinancing risks, according to a June 12 report by S&P Global Ratings.
The rating agency estimates shadow banking — financing activities carried out by unregulated institutions, such as asset management plans and entrusted loans — accounts for an average of about 20% of the total debt of its rated developers. But that proportion could be escalated to 40% for developers with ratings of B and below.
The shutdown of this essential channel is putting increasing pressure on developers rated B and lower, in S&P's view, as they now have to consider alternative ways of refinancing a big proportion of their total debt and liabilities.
Overall, S&P said Chinese developers would find it increasingly difficult to roll over their debt, and expansion would become challenging due to the lack of funding, all owing to the sector's record-high level of debt maturing in the coming two years and the country's ongoing deleveraging campaign.
Liquidity woes are likely to "weaken the liquidity positions of about 40% of [the] rated developers, possibly resulting in downgrades," said S&P Global Ratings credit analyst Esther Liu.
The report also warned that some small developers have already defaulted and there would only be more of such cases surfacing.
On a financial scale, the gap between stronger and weaker developers will widen even more amid the tougher financing environment, with good sales execution and financial prudence becoming crucial for developers to defend their liquidity positions and credit profiles, according to the rating agency.
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.
