China Vanke Faces Liquidity Crisis as Sales Decline, Government Intervenes

China Vanke, the second-largest property developer, is in a liquidity crisis as its sales fall below the break-even point, prompting government intervention and a scramble for collateral. The outcome will have broader implications for the stability of the Chinese property sector.

China Vanke Faces Liquidity Crisis as Sales Decline, Government Intervenes

China Vanke, the second-largest property developer in China, is currently grappling with a liquidity crisis as its sales for January and February have fallen below the break-even point of 20 billion yuan ($2.8 billion) per month. This concerning situation has prompted a rare intervention by the Chinese government, which is now calling on financial firms and creditors to provide Vanke with much-needed financing support.

( Credit to: Finance )

In response to the crisis, Vanke has proposed using its commercial projects, such as shopping malls, as collateral to access fresh credit. The company has compiled a list of these projects and their revenue streams to present to potential lenders. Industrial and Commercial Bank of China (ICBC), along with a group of other banks, is currently in preliminary talks to lend as much as 80 billion yuan to Vanke.

Lenders are currently reviewing the higher-value assets that Vanke has proposed as collateral. Insurer-creditors have also demanded additional collateral before agreeing to extend the maturities of their debt holdings. This cautious approach from creditors reflects the overall slowdown in the Chinese property market and the associated risks.

Vanke Proposes Commercial Projects as Collateral to Secure Fresh Credit

In an effort to address the liquidity crisis, Vanke has put forth the idea of using its commercial projects, primarily shopping malls, as collateral to secure new credit. The company has shared a comprehensive list of these projects and their respective revenue streams with potential lenders. Industrial and Commercial Bank of China (ICBC) and a consortium of other banks are currently engaged in early discussions to potentially lend up to 80 billion yuan to Vanke.

The lenders are currently evaluating the higher-value assets that Vanke has proposed as collateral. Additionally, insurer-creditors have expressed the need for additional collateral before granting extensions on their debt holdings. This cautious approach by the creditors reflects the broader slowdown in the Chinese property market and the associated risks.

Analysts Estimate Value of Vanke’s Unpledged Commercial Property

Industry analysts have estimated that Vanke’s unpledged commercial property is valued between 77 billion and 90 billion yuan. This means that if banks lend at a loan-to-value ratio of 50%, Vanke could potentially borrow up to 45 billion yuan. However, Vanke is under pressure to provide high-value guarantees and collateral to secure these loans.

While Vanke is expected to have enough cash to repay $1.4 billion worth of public bonds maturing this year, concerns arise regarding its long-term repayment capability. The company is facing a significant amount of debt due in 2025, and its cash reserves are depleting rapidly.

Vanke’s Financial Struggles Amidst a Challenging Chinese Property Market

Vanke’s financial struggles come at a time when other major property developers in China, such as China Evergrande Group and Country Garden, have also faced debt defaults amidst a downturn in the industry. The decline in sales and the potential difficulties in repaying debt could further erode confidence among homebuyers and investors.

Vanke has reached out to its creditors, including Taikang Insurance, PICC Property and Casualty, and New China Life Insurance, to request permission to extend debt maturities. However, these insurer-creditors have demanded new collateral as a condition for granting the extensions.

Despite the challenges, there is a glimmer of hope for Vanke. Its top shareholder, Shenzhen Metro, has agreed to subscribe to up to 30% of units of Vanke’s consumption REIT backed by a shopping mall in Hangzhou. This investment is seen as a relatively low-risk move and could indicate some level of confidence in Vanke’s business.

Overall, the situation at Vanke highlights the ongoing struggles in the Chinese property market. The government’s intervention and the scramble for collateral demonstrate the urgency to address the liquidity crisis. The outcome will not only impact Vanke but also have broader implications for the stability of the property sector in China.