The controversial developer Evergrande in China is on the brink of collapse. This is why it’s important

Home sales plummeted along with homebuyer confidence. Home sales by value fell 16.31% from last year in November, a fifth month of declines. New home prices fell 0.3% from the previous month, the biggest drop since February 2015, according to Reuters.

Fitch said in his report that in a severe scenario where home sales fall by 30%, 12 or about a third of the 40 developers assessed could experience negative cash flow. In Fitch’s base case — a less severe scenario — a 15% drop in home sales could leave about 13% of rated developers in cash shortfall.

Chinese developers will face $19.8 billion in maturing offshore US dollar-denominated bonds in the first quarter and $18.5 billion in the second, Nomura analysts estimate in a recent note. That amount in the first quarter is nearly double the $10.2 billion in fourth quarter maturities, the analysts said.

In the coming year, real estate developers will have to deal with even higher bond maturities.

Developers rated “B” or lower, in particular, will face mounting pressure to repay offshore debt, with maturing or netting offshore bonds having higher principals in 2022 than in 2021, Fitch said. Putable bonds allow their holders to force the issuer to redeem the bond before maturity.

A “B” rating means that there is material default risk, but a limited margin of safety remains.

Hidden debt exacerbates liquidity pressures

As the debt crisis unfolded, there was also doubt about the lack of transparency about the true extent of developers’ liabilities.

“Some credit distress in recent months has also cast doubt on the transparency of companies’ disclosures and contingent liabilities,” Fitch said.

One example was Fantasia, which had a private bond not disclosed in the company’s financial reports that: Fitch marked in October.

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“The rise of ‘hidden private debt’ is exacerbating liquidity pressures, especially for lower-rated developers with large bond maturities ahead,” Fitch said in the report last week.

Such hidden debt would include undisclosed debt and loan guarantees from joint ventures, associates and other third parties that allow developers to circumvent China’s “three red lines” debt limits, Fitch said.

That policy puts a limit on debt relative to a company’s cash flows, assets and capital levels, and aims to rein in developers after years of growth fueled by excessive debt.

Developer issues may drop soon

Looking ahead, analysts don’t expect the market conditions troubling developers to ease until sometime next year.

Guangzhou Evergrande Football Stadium under construction in Guangzhou, China’s Guangdong Province on September 17, 2021

STR | AFP | Getty Images

Monica Hsiao, founder and chief investment officer at Triada Capital, said she expects a “floor” for Chinese high-yield bonds, essentially real estate bonds, in the first half of next year.

“Because the market is really waiting to see if the government pain line for more material policies eases, and much of the market believes it will be in the first quarter,” she told CNBC’s Street Signs Asia on Friday. .

Early this month, investor sentiment in the real estate sector was boosted as China’s monetary policy eased. For the second time this year, the central bank cut the reserve requirement, or the amount of cash banks must hold as reserves, freeing up 1.2 trillion yuan ($282 billion) to stimulate the economy.

Fitch added that the work environment for Chinese developers will remain challenging and that a “meaningful recovery in funding and market access conditions” will not come until the second half of 2022.

— Evelyn Cheng of CNBC contributed to this report.

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