Vanke bond's 144% rally shows credit strain easing after rescue
FINANCIAL strains are easing at China Vanke after its largest state shareholder threw a lifeline to the company that proved too big to fail.
Since local government officials intervened in January to stabilise Vanke's operations and finances, the builder has repaid publicly traded bonds with a combined principal of 14.4 billion yuan (S$2.6 billion). That included a 3.15 per cent US dollar bond with US$423 million outstanding which matured on May 12, its only such note of the year, Bloomberg reported.
In four months, its longer dated US dollar bonds have bounced more than 44 US cents to above 74 US cents on the US dollar. While that's still a distressed level, the move suggests investors holding such assets since Jan 16 through the turmoil this year may have amassed a return of nearly 144 per cent as of May 16.
Vanke's stocks remain lacklustre, with its Hong Kong and mainland-traded shares both down about 6 per cent since the late January overhaul.
'Near-term default risks have likely abated, considering the expectation of shareholder support,' Leonard Law, a senior credit analyst in Lucror Analytics Singapore, wrote in a note last week.
Government rescue efforts for Vanke are trickling out. Since late April, Vanke announced it received two generous loans from its largest shareholder Shenzhen Metro Group. Vanke may prepay at any time, extend the repayment period with the lender's consent, and is allowed to pay the interest together with the principal at maturity, according to terms disclosed in exchange filings.
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A total of US$6.1 billion of Vanke's debt has emerged from distressed trading levels since Jan 17, according to data compiled by Bloomberg News.
The recent two loans stood out from the previous ones extended around February, as no requests for asset pledging were mentioned. 'These two loans without collateral signal Shenzhen Metro has stepped up its support for Vanke,' said Yan Yuejin, vice-president of Shanghai E-house's research arm.
All of Shenzhen Metro's four loans this year carry a floating interest rate of 76 basis points lower than China's benchmark lending rate for short-term loans, which stood at 2.34 per cent as at early May. They are all earmarked to help Vanke repay principal and interest on publicly issued bonds, filings showed.
'We recognise Vanke's efforts to fulfil delivery and debt obligations,' with state help, Citigroup analysts led by Griffin Chan wrote in a May 1 report. Still, the Wall Street bank downgraded the company's stock to neutral due to its continued losses.
Concerns linger
Despite state backing, Vanke is not completely out of the woods. The builder and its subsidiaries still have 25.4 billion yuan of onshore bonds maturing or facing redemption this year, according to data compiled by Bloomberg.
The maturity wall comes as the developer's contract sales continued to weaken, which is set to widen its funding gap, according to Bloomberg Intelligence analysts Kristy Hung and Monica Si.
Fitch Ratings downgraded Vanke's long-term issuer default score by one notch to CCC+, a rating that indicates a default is a real possibility.
Vanke's sales declined nearly 40 per cent on year in the first quarter, worse than Fitch's expectation of a 20 per cent full-year decline. The drop widened to 45 per cent in April from a year prior, according to China Real Estate Information Corp, more severe than an 8.7 per cent drop seen in peers.
'We expect the weak fundamentals for Vanke to continue without a rosy recovery of the overall sector,' Iris Chen, a credit desk analyst at Nomura International HK, wrote in a recent note in April. BLOOMBERG
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