In a recent development that adds to the challenges facing the Chinese real estate sector, S&P Global has downgraded China Vanke, marking it the latest major credit rating agency to revoke its investment-grade rating. This decision reflects growing concerns over the health of the property market in China.
The downgrade saw China Vanke's rating fall dramatically by three levels to BB+ from BBB+, positioning it in the 'junk' category, also referred to as 'non-investment grade'. This move underscores the escalating financial pressures on one of China's leading property developers.
The rationale behind the downgrade was attributed to Vanke's declining market competitiveness and increasing financial leverage. S&P immediately placed the new rating under a negative outlook, indicating potential further downgrades.
Despite expectations that Vanke will manage its debt obligations for the current year, S&P issued a cautionary note regarding the potential for further decline in sales over the next year. This is largely due to the persistent downturn in the Chinese real estate market.
S&P expressed concerns over the anticipated drop in Vanke's "contracted sales" and profit margins, which they believe will weaken the company's market stance. They forecast a reduction in contracted sales to between 270-280 billion yuan for the period of 2024-2026, which represents a 25%-28% decrease from the previous year and a significant 60% fall from the 2020 peak of 704 billion yuan.
The downgrade saga began last month when S&P issued a downgrade warning shortly after Moody's initiated the downgrade into junk status. Fitch Ratings followed closely with a similar move.
Additionally, the downgrade affected Vanke's subsidiary, Vanke Real Estate (Hong Kong), with its rating cut to 'BB' from 'BBB'. The issue rating on Vanke HK's senior unsecured notes was also reduced to 'BB' from 'BBB'.
