Moody’s sees better credit metrics for homebuilders 
2019-04-29
The credit metrics of a majority of Chinese property developers will continue to improve over the next 12-18 months, according to a report from global ratings agency Moody’s.
Of 62 developers rated by Moody’s, 40 saw their credit metrics improve slightly in 2018, and the trend will continue in the coming months, bolstered by disciplined spending on land, the report said.
“Many large and mid-size developers have lowered their sales growth targets for 2019, which will reduce their need to make debt-funded land purchases,” said Cedric Lai, a Moody’s vice president and senior analyst.
The 40 companies’ ratio of weighted-average revenue to adjusted debt will increase to 73 percent in 2019 from 63 percent in 2018, according to the report.
The improvement will come even as developers’ sales growth slows and profit margins contract. China’s property sector has cooled in recent years after runaway home prices fueled speculation and triggered government curbs aimed at preventing asset bubbles.
This month, a meeting of the Political Bureau of the Communist Party of China Central Committee reiterated that the country should stick to the principle that “housing is for living in, not speculation.”
Meanwhile, according to a separate report by Fitch Ratings, small Chinese building companies are likely to face high liquidity risks in 2019 as banks tighten lending to property developers last year and borrowing costs in onshore and offshore markets have generally risen.
Although funding conditions have improved this year and high-churn homebuilders have reported stronger cash collection from sales, low-churn homebuilders continue to face struggle to collect enough cash to fund existing projects and they may need to rely on external funding or asset sales to meet liquidity needs, the ratings agency noted.
It expects higher funding cost and shorter loan tenors to exacerbate small companies’ liquidity risks in 2019, as refinancing of existing offshore maturities has come at a higher cost, which will increase cash outflow for interest payments.
Small home-building companies with tight funding channels have increasingly turned to asset sales to boost liquidity, and Fitch said this could lead to issuers exiting the property development business.
Fitch said it would increase its focus on the management and execution of refinancing risks, particularly of low-churn homebuilders.
It downgraded the rating on Guorui Properties to B- from B in March to reflect its debt repayment pressure, even though it was able to use the proceeds from its recent US dollar bond issuance to refinance onshore maturities.
