Concern Is Mounting About Troubled Chinese Builders’ Asset Sales

(Bloomberg) -- Investors in China’s distressed developers are becoming increasingly concerned that a key way for the firms to get much needed short-term financing is clouding their longer-term business outlooks.

Developers have used asset sales to shore up finances even as they sometimes offload projects at a loss. Last week, Guangzhou R&F announced it agreed to sell a 50%-held project in London and expected to record a loss from the disposal of about HK$1.84 billion ($234.4 million). Zhenro Properties Group recently pledged to accelerate asset sales. 

Developers may offer assets at a discount or even at a loss to get quick cash but this may force them to part with good-quality projects, leading the quality of the remaining assets to deteriorate, according to Tan Shengying, fixed income analyst at HFT Investment Management. “Selling assets could be considered costing the developer’s liquidity in the future.”

Offloading assets might also be seen as a sign of weakness for investors and banks, which could then tighten financing further, according to Tan.

That’s a particular concern for developers whose sales have slumped amid China’s Covid regulations. While some builders have rallied since last week when the nation’s top leaders vowed to support the property market, figures released over the holiday weekend showed a slump in home sales deepened in April.

Here’s what others say: 

Kaven Tsang, senior vice president at Moody’s Investors Service

• Asset sales have become an increasingly important way for developers to get financing as other funding channels tightened. Yet, sizable transactions may undermine their ability to generate future cash flow.
• “If the companies disposing assets cannot get the transactions done in a timely manner, their ability to repay debt would also be uncertain.”

Iris Chen, Nomura credit desk analyst

• For companies that haven’t yet been forced to offer exchanges or that haven’t yet defaulted, asset disposals should be helpful for managing near-term liquidity.
• But for names that are already at the stage of defaulting, disposals typically are prioritized for pledged loans, and the extent that asset disposal may help with restructuring progress depends on how much money is left after the pledged loans are paid off.

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With assistance from Bloomberg