China Vanke gets caught in debt spiral – first losses in two decades

China Vanke is facing increasing concerns about its ability to pay off debts after the company posted losses for the first time in two decades. According to Bloomberg, the company had a short-term refinancing gap of about 12 billion yuan ($1.69 billion) at the end of June due to a rise in long-term debt within a year. This is the first time since at least 2014 that Vanke's cash reserves have not been sufficient to cover interest-bearing debts maturing within a year. Vanke's debt problems highlight how even the highest-quality developers are affected by China's unprecedented real estate crisis. Despite having avoided a default thus far, Vanke's predicament could have broader implications due to its extensive links with national financial and governmental authorities, potentially having a greater impact than the defaults of its rivals China Evergrande and Country Garden. Vanke's 3.15% dollar bonds due in 2025 fell by 2 cents to 83 cents, marking the largest daily drop in over three months. The company's shares also declined by up to 3.65% in Hong Kong. The rescue package launched in May for China's real estate market is losing momentum, as home purchases continued to decline in August, with further price drops expected. Concerns have been exacerbated by a series of disappointing earnings reports from consumer goods companies and a cut in China's growth forecast by UBS. This downgrade reflects the emerging view that the country may miss its growth target of around 5% for 2024. Despite widespread defaults among other developers, Vanke has so far avoided default. In contrast, companies like Country Garden and Shimao Group Holdings are facing court hearings to wind up their businesses, and former giant Evergrande has been forced into liquidation. Vanke's earnings report on Friday underscores the severe impact of the prolonged real estate downturn on China's fourth-largest developer by revenue. The company reported a net loss of 9.85 billion yuan for the six months ending June 30, marking its first half-year loss since at least 2003. This exceeded the upper range indicated by the firm in July, compared to an annual profit of 12.2 billion yuan last year. Vanke's financial losses, primarily occurring in the second quarter, highlight the worsening market slump, with sales and prices continuing to fall. Local governments are reducing interventions in the pricing of new housing projects, forcing developers to offer significant discounts to attract buyers. While bond investors do not believe that Vanke is at immediate risk of default, the long-term outlook remains uncertain. Moody's Ratings had given Vanke an investment-grade rating as recently as March, but downgraded the developer to B1 last month, four notches into "junk" territory. Vanke plans to exit non-core activities and sell assets to improve liquidity. In the short term, Vanke only has 2 billion yuan of public debt maturing this year. According to CEO Zhu Jiusheng, sufficient funds are available to pay off a yuan bond due on September 6. A bailout plan could provide some relief by enabling homebuyers to switch to banks with lower mortgage rates. Despite the half-year loss, Vanke Chairman Yu Liang remains optimistic about the long-term prospects of the Chinese real estate market. "China's potential demand for home ownership is still large, even though it has fallen from its peak," Yu said. "It is underestimated.