This week, two major credit rating agencies downgraded Shanghai-based developer Shimao Group further into junk territory. The company has been grappling with mounting debt and is considering selling some properties to reduce its debt load.
“Shimao’s liquidity has significantly deteriorated — the decline is worse than we previously anticipated,” said S&P Global Ratings, which cut the company’s credit rating to B-. Just two months ago, S&P was still rating Shimao as investment grade. “We now assess the company’s liquidity to be weak.”
Moody’s on Monday cut Shimao’s rating to B2 citing “elevated” liquidity risks, a large amount of debt due in the near term, and weakening access to funding.
But it acknowledged that it is in discussions with potential buyers about some asset sales.
The company “may consider disposing of certain properties if the terms and conditions are appropriate,” it added.
Shimao was once considered a healthier developer than its heavily indebted rivals. But in the last month it has suffered a bond and stock rout as debt woes spread in the property sector.
Shares of Shimao Group have tumbled more than 20% in the past month.
Shimao Group has a large number of debt maturities due in 2022, including $1.7 billion worth of offshore bonds, 8.9 billion yuan ($1.4 billion) worth of onshore bonds, and “sizable” offshore bank loans, according to Moody’s.
But the company is making “slow progress” on fundraising and refinancing, increasing uncertainties over its ability to pay off debt, according to Moody’s. The ratings agency also forecast Shimao’s property sales to decline “notably” over the next six-to-12 months, impacted by weakening homebuyer confidence.
S&P analysts also expect Shimao’s liquidity to further deteriorate.
“The company is facing heightened refinancing risks due to still-tight regulatory conditions, apart from the materially weakened capital markets access,” they said.
Other developers — including Kaisa and Fantasia — are also struggling with the fallout from the real estate sector turmoil, as the deepening slowdown in the property market, coupled with risk aversion among banks and investors, makes it harder for them to refinance.
On Tuesday, analysts from Morningstar said liquidity stress in China’s property sector could become a “downward spiral” because of all the credit rating downgrades, which will cut off developers from accessing capital markets even more.
“To restore confidence in the sector, the authorities should be supportive of financing efforts by better names like Shimao, which has complied with” financial regulatory guidelines, wrote Cheng-wee Tan, a senior equity analyst at Morningstar, in a research note.
The Chinese government has taken steps to contain the property slowdown, including the move by local authorities to work with Evergrande on risk management.
Tan said the authorities could also provide specific support to “better names” in the industry, such as directing state firms to purchase assets from those developers.