Chinese property giant Vanke seeks more time to repay debts as market slump lingers
Chinese property giant Vanke has avoided defaulting on its publicly traded bonds so far even during the prolonged market crisis. But its balance sheet has been weakened by falling sales of new homes and fragile market sentiment, and it has resorted to offloading assets to repay its debts on time.
(By Caixin journalists Wu Yujian, Ding Feng, Chen Bo and Zhang Yukun)
China's prolonged property slump and continuing squeeze on developers' finances have led to renewed pressure on state-backed China Vanke Co. Ltd. ( 万科企业股份有限公司), one of the country's most financially robust home builders.
The Shenzhen-based developer is trying to extend around 5 billion RMB (US$695 million) of privately issued debt owed to two state-backed insurance sector companies that had already been extended once, sources with knowledge of the matter told Caixin. The liabilities were originally due for repayment on 11 December and in January respectively, but were extended by three months after talks with creditors and help from regulators, they said.
The extensions are about to expire and Vanke is again seeking to postpone the repayments, according to the sources.
The bonds and Shenzhen-listed shares of Vanke, China's second largest real estate developer by sales value, tumbled on Monday as word spread that it was in talks to extend unlisted, privately held debt, and that one creditor, New China Asset Management Co. Ltd. (NCAM), was refusing to budge on the 10 billion RMB it was owed.
NCAM, the asset management subsidiary of New China Life Insurance Co. Ltd. ( 新华人寿保险股份有限公司), issued a statement on Sunday that did not directly refer to the debt talks, but said that it maintains normal business cooperation with Vanke, and that it supports the healthy development of China's property industry.
Vanke's Shenzhen-listed shares briefly rebounded on 5 March but then slipped for the next three days, although prices of several of its RMB bonds rebounded and surged on 8 March, with one issued in 2022 soaring by the upper daily limit of 20%.
Debt investment plans
NCAM has sold nine debt investment plans involving Vanke since 2019 with the potential to raise up to 14.6 billion RMB, according to its parent company's financial report and information from sources. The funds raised were poured into Vanke projects with many investors in these plans being other insurers or their asset management units.
Debt investment plans linked to Vanke properties were favoured by insurers, who saw them as safe bets due to Vanke's once-stellar credit rating and stable performance...
Such debt investment plans are similar to trust plans issued by trust companies - the funds raised are mainly invested in real estate and infrastructure projects - but are of longer duration, typically ranging from five to 15 years. Creditors usually have the right to demand their principal back at a pre-agreed time before the entire plan matures. The plans are classified as non-standard private debt as they are not traded on the interbank market or stock exchanges.
Three debt plans sold by NCAM and invested in Vanke properties were recorded in New China Life Insurance's mid-year report for 2023. The properties include a commercial complex project in Kunming, the capital city of Southwest China's Yunnan province.
Debt investment plans linked to Vanke properties were favoured by insurers, who saw them as safe bets due to Vanke's once-stellar credit rating and stable performance, industry sources told Caixin.
From December 2019 to July 2023, seven insurance sector companies, mostly asset managers, set up 23 debt investment plans that invested in Vanke's real estate and infrastructure projects, according to industry data seen by Caixin. The plans had a total registered capital of 40.2 billion RMB, although it is not clear if all the money has been paid in.
In addition to NCAM, major issuers include Taikang Asset Management Co. Ltd., whose plans had a total registered capital of 9.3 billion RMB, subsidiaries of Ping An Insurance (Group) Co. of China Ltd. - Ping An Asset Management Co. Ltd. and Ping An Annuity Insurance Co. of China Ltd. - which between them set up plans with a registered capital of 8.4 billion RMB, and Taiping Asset Management Co. Ltd. whose plans had a registered capital of 5 billion RMB.
Investment-grade ratings
In September, Vanke announced that its wholly owned subsidiary, Beijing Wanyong Real Estate Development Co. Ltd., had signed an agreement with Huatai Asset Management Co. Ltd. to set up one or multiple debt investment plans to raise up to 4 billion RMB of funding for as long as ten years.
Vanke is one of the few remaining property developers with an investment-grade credit rating, although Moody's Investors Service cut the company's issuer rating in November to Baa3 and Fitch Ratings lowered its rating to BBB in October, both representing the lowest investment-grade ratings.
The state-backed property giant has avoided defaulting on its publicly traded bonds so far even during the prolonged market crisis. But its balance sheet has been weakened by falling sales of new homes and fragile market sentiment, and it has resorted to offloading assets to repay its debts on time.
As the depressed state of the property market shows little sign of improvement and bond investors and banks become increasingly wary of lending to developers, Vanke is facing growing liquidity stress as it enters a peak debt repayment period. It has 15.3 billion RMB worth of onshore and offshore bonds that are either maturing or have put options that can be exercised in the first half of 2024.
A source with ties to insurance companies told Caixin that Vanke may have enough cash on its books to repay the insurers but has chosen not to.
A source with ties to insurance companies told Caixin that Vanke may have enough cash on its books to repay the insurers but has chosen not to. A property industry source said the company may be holding off repaying its private debt because it wants to conserve cash to pay back maturing publicly traded bonds. Defaulting on the latter could have more severe consequences for the company and damage its credibility in capital markets, whereas privately held debt can be negotiated without attracting public attention.
Insurers dominate investments
The company had previously secured three-month extensions on two debt investment plans, after negotiating with creditors under the guidance of the country's top financial regulator, sources with knowledge of the matter told Caixin.
One of the two plans, sold by NCAM, involves 3 billion RMB of investment in Vanke's property projects. The original extension agreement is about to expire and negotiations on a further extension have started.
Dajia Insurance Group Co. Ltd., China Taiping Insurance Group Ltd. and Taikang are among those who bought into the plan, while funds also came from other companies' pension funds. Negotiating an extension to the plan could be challenging because multiple parties are involved.
The other plan was issued by the asset management unit of China Taiping. Vanke would have had to repay around 2 billion RMB in January had the extension not been brokered with the help of the National Financial Regulatory Administration, sources with knowledge of the dealings told Caixin.
It is likely that Vanke hopes to postpone repaying the insurers to prioritise the repayment of bonds and other debt traded on the open market, multiple sources told Caixin.
By the end of June, two of Vanke's RMB-denominated bonds totalling around 3 billion RMB will mature or have put options that can be exercised, allowing bondholders to demand repayment ahead of maturity, according to data provider Dealing Matrix. Three offshore bonds totalling around 10.3 billion RMB will also mature by the end of June.
Out of the first-half total, a 2 billion-RMB medium-term note that matured in January has been repaid, and Vanke said on 5 March that it had secured the funds to repay a US$630 million offshore bond maturing on 11 March.
By the end of September, the developer had around 60 billion RMB of available cash on its books, according to Caixin calculations based on its most recent financial report. That would be enough to cover repayments on short-term borrowings and non-current liabilities maturing in 12 months.
But with around 37 billion RMB of bonds falling due in 2025 - based on Caixin calculations - and the continuing depressed outlook for China's property sector, Vanke's headaches are far from over.
Falling sales
But investors remain concerned about Vanke's liquidity, partly because of plunging sales revenue. Contracted sales in 2023 tumbled 9.8% by value, data published by the developer show. In January and February this year, they dropped 34% and 55% respectively, according to Caixin calculations based on data compiled by consultancy China Real Estate Information Corp.
A source who works in sales for a private property developer told Caixin that Vanke expects a 40% drop in sales for 2024.
Amid the looming repayment mountain, Vanke has offloaded assets to raise cash.
In February, it signed a deal to sell its stake in a Shanghai retail complex, a major revenue contributor, at a discount of around 26% on its appraised value. It has also been trying to sell a property project in Shenzhen to a local subway construction company, sources with knowledge of the matter said.
Vanke is also trying to raise money by taking out new loans. It recently applied for a syndicated loan from a group of lenders led by Bank of China (Hong Kong) Ltd., sources familiar with the matter told Caixin.
But with around 37 billion RMB of bonds falling due in 2025 - based on Caixin calculations - and the continuing depressed outlook for China's property sector, Vanke's headaches are far from over.
This article was first published by Caixin Global as "In Depth: Chinese Property Giant Vanke Seeks More Time to Repay Debts as Market Slump Lingers". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.
