China Vanke debt exposed after first loss in 20 years

(Bloomberg) — China Vanke Co . faces growing concerns about its ability to repay debt after posting its first loss in two decades.

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Vanke had a short-term refinancing shortfall of about 12 billion yuan ($1.69 billion) at the end of June due to an increase in long-term debt within a year, according to Bloomberg calculations based on company data . It is the first time Vanke’s cash balance has failed to cover interest-bearing debt maturing in less than a year since at least 2014.

As a sign of China’s housing crisis, Vanke’s debt woes underscore that even the highest-quality developers have been caught up in the unprecedented housing crisis. Although it has so far avoided default, Vanke’s extensive connections to the nation’s financial and government-backed entities mean its suffering could eclipse the turmoil caused by defaults at rivals China Evergrande Group and Country Garden Holdings Co.

Vanke’s 3.15% dollar notes due 2025 were 2 cents lower at 83 cents as of 10:10 a.m., heading for their biggest daily decline in more than three months , according to data compiled by Bloomberg. Its shares fell as much as 3.65 percent in Hong Kong.

China’s housing bailout in May is losing steam as home sales deepened in August and prices are expected to fall further. Concerns have intensified in recent weeks after a series of disappointing earnings reports from consumer companies and a cut in China’s growth forecast by UBS Group AG. The downgrade reflects a developing consensus that the country may miss its growth target of around 5% in 2024.

Vanke, whose majority shareholder is a Shenzhen-based state-owned firm, is one of the few struggling developers that has not yet delayed downtown. Country Garden and Shimao Group Holdings Ltd. face winding-up hearings in Hong Kong courts, while former giant Evergrande has been ordered to wind up.

Vanke’s earnings report on Friday showed how much the extended housing slump is hurting China’s fourth-largest developer by sales. The company posted a net loss of 9.85 billion yuan for the six months ended June 30, its first half-year loss since at least 2003. That’s higher than the upper range the company reported in July and compares with an annual profit of 12.2 billion yuan last year.

Vanke’s loss signals that its finances took a heavy hit in the second quarter, given that it only lost 362 million yuan in the first three months. Since then, the slowdown in the Chinese market has deepened as sales and prices continue to fall. Local authorities are reducing intervention on the prices of new residential projects, prompting developers to offer deep discounts to attract buyers.

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Bond investors are betting that Vanke is not at immediate risk of default, although its long-term prospects are less certain. Moody’s Ratings, which had Vanke at investment grade as recently as March, downgraded the developer to B1 last month, four notches into junk territory.

Vanke will divest non-core activities and divest assets for liquidity

Vanke faces a funding shortfall of 14 billion yuan if leases payable are included, according to Bloomberg Intelligence analysts Daniel Fan and Hui Yen Tay. That hole could be plugged through access to financing, they said, adding that the company can dispose of more assets and raise secured debt.

For the rest of this year, Vanke has only 2 billion yuan of public debt coming down, Chief Executive Zhu Jiusheng said on Friday. The firm has notified some investors that it has enough cash to repay a yuan bond due on Sept. 6, according to a Bloomberg report last week. Vanke has no dollar bonds due this year and has a total of 128.5 billion yuan of public bonds and loans outstanding, according to data compiled by Bloomberg.

What Bloomberg Intelligence Says:

“Vanke could survive the current down cycle given its ability to access financing from state-owned banks such as Industrial and Commercial Bank of China and China Construction Bank.”

-Analysts Daniel Fan, Hui Yen Tay

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Vanke and the other developers could get some relief from a plan to allow homebuyers to switch to banks offering lower mortgage rates, Bloomberg reported last week.

Despite the loss in the first half of the year, Vanke Chairman Yu Liang remains optimistic about China’s long-term housing prospects.

“China’s potential demand for home buying is still huge, even though it has declined from the peak,” Yu said. “It’s underrated.”

–With the help of Yuling Yang.

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