The collapse of Zhejiang Xingrun Real Estate Co (unrated) is an isolated incident, but does highlight the vulnerability of small, highly levered developers with weak sales execution ability and high refinancing needs, according to Moody's Investors Service.
"In this environment, we believe financiers and investors will become more selective and favor borrowers with relatively strong credit quality, thereby further pressuring the liquidity of financially weak developers," says Franco Leung, a Moody's Assistant Vice President and Analyst.
Developers with weak sales execution capability and financial discipline will need to manage their overstretched balance sheets by selling assets, or risk being taken over or filing for bankruptcy.
"The financing cost differentials between the strong and weak credits will likely widen as a result, and large and established property developers with solid credit profiles will benefit from this differentiation," says Leung.
Leung was speaking on the release of a Moody's report on Zhejiang Xingrun and titled, "Local Developer's Debt Woes Will Heighten Liquidity Risk for Highly Levered Companies."
The report notes that most of Moody's 50 rated developers have multiple funding channels, sound liquidity buffers and geographic diversification.
In particular, the rated developers have raised a total of USD9.1 billion in offshore bonds since the beginning of 2014, compared to US$1.9 billion of offshore bonds maturing during the remainder of this year.
"Therefore, we do not expect a systematic liquidity crunch for the rated Chinese developers in the next six to 12 months. Their brand names, sales execution capabilities and financial discipline continue to play an important role in the sustainability of their businesses," says Leung.
At the same time, Moody's believes that China's housing demand growth in the next 12-18 months will soften compared to 2013, and developers will therefore need to balance their sales collection against their land purchases and development of new projects.
However, Moody's does not see a severe slowdown in rated developers' sales as China's ongoing urbanization plans will underpin demand for mass market housing over the next three to five years.