Moody’s has downgraded a Chinese developer with a landbank of around 37 mln m2.
The rating’s agency stated that it had lowered Jiangsu Zhongnan Construction Group's corporate family rating (CFR) to Ca from Caa2, and the senior unsecured rating on the bonds issued by Haimen Zhongnan Investment Dev (Intl) Co Ltd and guaranteed by Jiangsu Zhongnan to C from Caa3.
Jiangsu Zhongnan is based in China's Jiangsu Province on the east coast of the country.
In a statement, Cedric Lai, Moody's VP and senior analyst, said: ‘The downgrade reflects our expectation of weak recovery prospects for Jiangsu Zhongnan's bondholders, following the company's interest payment default on its USD bond.’
‘The negative outlook reflects our view that recovery prospects for Jiangsu Zhongnan's creditors could weaken further if the interest payment default extends to a wider default of other debts.’
Jiangsu Zhongnan announced on 7 November that it had missed the interest payment on its outstanding offshore bond. The interest payment default reflects the company's weak liquidity and constrained financial flexibility, and weak recovery prospects for its creditors.
Moody’s also warned it could also trigger a cross default and accelerate the repayment of the company's other debt obligations. The company would have to rely on asset disposals or other fundraising plans for debt servicing. However, there are high uncertainties associated with such fundraising activities.
In terms of environmental, social and governance (ESG) considerations, Moody's has considered the company's concentrated ownership by Zhongnan Urban Construction Investment Co, which had a 52.09% stake in the company as of 5 November 2022, and the risks posed by its shareholder's share pledge financing. The agency has also considered Jiangsu Zhongnan's elevated financial risk associated with debt restructuring as it defaults on its interest payment.
China problems
Commentators are major Chinese developers are facing a cash flow crunch, combined with a slowdown in sales of residential properties and a boycott by people angered that homes tjhey paid for in advance have not been completed.
CNBC recently reported that a year after Chinese developer Evergrande’s debt problems began rattling investors, the country’s real estate troubles have only become worse.
‘I doubt there will be direct bailouts of property developers by the government, even though they may continue to ask banks and [state-owned enterprises] to help selected troubled developers,’ said Tommy Wu, senior China economist at Commerzbank.
Problems for some Chinese developers have had direct implications for European development projects.
Perhaps the best-known example is the £1 bn (€1.13 bn) One Nine Elms development in London currently under development. When the Chinese government effectively turned off taps for the Chinese developer involved, the construction arm of Brookfield did not get paid. The situation led to a £770 mln refinance this year involving Apollo Global Management, as well as Carlyle’s global credit platform, Crosstree Real Estate Partners, and Précis Capital Partners.
