The ongoing coronavirus crisis is adding pressure to Chinese debt, according to a recent report by Fitch Ratings which underlined smaller developers as the ones that faced the highest refinancing risk.
166 companies rated by the firm face 583 billion yuan ($83.5 billion) of debt due between February and June this year. Of the 166, 12 firms had a «moderate to high» risk of refinancing, including eight estate development companies. Six developers are also projected to face «high» refinancing risks.
«Small home builders that are more challenged by liquidity and funding access will be the most affected,» said the report, written by a team of Fitch analysts led by Matt Jamieson.
Other sectors feeling the liquidity headwinds from the outbreak include retail, leisure, consumer and automakers, the rating agency added.
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Asia's insatiable appetite for higher yields has frequently led to less than ideal diversification, often into smaller developers that offer more attractive coupons albeit at a higher risk. Although active managers will be able to rebalance, secondary markets may not be as accessible for clients holding fixed maturity bond funds or single holdings often coupled with high leverage.
With high leverage comes potential margin calls and signs point to troubles even amongst larger real estate developers. Following the government’s decisions to shut thousands of sales offices, China’s third-largest listed developer China Evergrande, for example, said it would offer 25 percent discounts on all its projects from February 18.
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But for the broader state, the state of affairs remains relatively manageable. In addition to continuous monetary loosening, state-owned enterprises account for the vast majority of the maturing bonds inclining two-thirds from energy and utility issuers.
Fitch’s rating of Chinese debt accounts for factors such as outbreak impact, capital market refinancing burdens, ownership structures and the likelihood of state rescue.
«Our current base-case is that even for these issuers, the epidemic will be sufficiently contained in the near-term and that they will be able to manage their near-term refinancing needs,» Fitch said, adding that assumptions and ratings maybe reviewed if the outbreak does not stabilize in the coming weeks.
