Moody's negative on China property developers

KUALA LUMPUR: Moody's Investors Service has a negative outlook for China's property development sector over the next 12-18 months.

The international ratings agency said on May 19 local developers were facing continued operating uncertainties, imminent refinancing risk, and diminished balance-sheet liquidity.

“China's rated property developers still face critical challenges in the near and medium term despite a revival in property sales at the start of 2009,” it said.

The report's author and a Moody's analyst Kaven Tsang said property prices remained under pressure and inventories of unsold properties were still high so the recent improvement in sales volumes may not be sustainable.

"Issuers' balance-sheet liquidity and financial profiles continue to be weak, particularly for those developers still exposed to some large land payments coming due this year," he said.

On servicing debts in 2009 and 2010, he said a number of rated property developers in China had higher refinancing needs, particularly for their offshore debt.

Moody's senior credit officer and co-author Peter Choy said there were some mitigating factors, citing the Chinese government's loosening of credit to combat the global financial crisis.

He added the credit-loosening policy had improved onshore market liquidity and lowered interest rates while relaxed mortgage lending for second-home buyers has also spurred demand.

However, Choy conceded offshore sources of funds from international bond markets or foreign banks remained shut.

He also noted that worsening balance-sheet liquidity among issuers has resulted in negative rating actions for more than half of Moody's rated portfolio over the past six months.

"The high degree of domestic borrowing by developers not only raises subordination risk for bondholders, but also reduces the headroom under the debt-incurrence covenant,” he said.

"Our scenario analysis of financing needs and access to funding identifies certain vulnerable issuers, rated mostly in the Caa or low-B range, and several of these are highly exposed, with significant amounts of offshore debt coming due in the next six to 12 months."