Shuli Ren, Bloomberg
With about $5 billion in debt coming due this year, time is running out for China Vanke Co., the country’s largest privately-held real estate developer.
Vanke has no effective management at the top. State-owned Shenzhen Metro Group Co., its largest shareholder, held only a 27% stake as of last September, making it arguably a passive investor. By June, the company no longer had enough cash to cover short-term debt. Meanwhile, property sales remain anemic despite China’s housing rescue measures. Officials in Shenzhen, where Vanke is headquartered, held a closed-door meeting to discuss Vanke’s business operations on Friday, Bloomberg News reported.
The question now is how a restructuring might play out and what Vanke’s future could look like. Having brainstormed with investors onshore and off, I’ve mapped out three plausible outcomes: a blue-sky scenario, Squid Game or a muddled mess.
Let’s consider the blue-sky scenario first. China’s primary property market is now dominated by state-owned players, whom consumers trust will be able to deliver pre-sold homes on time. A consortium of state-owned enterprises may take over and become strategic investors in Vanke as a way to consolidate the industry as well as to provide national service and stabilize the housing market.
The white knights will probably come with strings attached. In exchange for their capital injection, a debt restructuring that forces creditors to absorb losses is inevitable.
The good news is that lenders can expect better eventual payouts. Vanke’s property sales might just start to bottom out once it obtains the prized state-owned status. In addition, past recovery rates for distressed SOEs tended to be much higher than their privately-held counterparts.
If white knights don’t emerge, we might stare into an ugly Squid Gam — the violent South Korean survival thriller — being played out in real life. Imagine so-called “creditor-on-creditor violence,” where lenders step over each other to claw their money back.
Already, we are seeing some of that rowdy behavior rearing its head. Vanke recently settled unpaid bills of 703 million yuan with its property management subsidiary Onewo Inc., by transferring equity rights of some of its commercial assets. In an interview with local media, Onewo’s chairman said that the firm would prefer to be repaid in cash, but if that’s not possible, its management needs to act fast and seize Vanke’s properties before others do.
Vanke has been in the midst of replacing maturing loans with collateralized bank borrowings. In the first half of 2024, it managed to obtain 63 billion yuan of secured bank credit. While the company may say this maneuver helps lower future interest payments, smaller creditors are legitimately worried that banks are conducting land grabs before a formal restructuring kicks off. For bondholders, expect dismal recovery rates under this scenario.
Since Vanke operates in China, where policymakers are fond of kicking the can down the road, we must also consider a muddled outcome.
It’s possible that the municipal government of Shenzhen provides some liquidity so the developer might scrape by as its debt maturity wall closes in. Of course, the state will have to try a lot harder, because Vanke’s debt pile this year is a lot higher than it was in 2024.
But procrastination is rarely a good fix.
Readers might ask why investors are so pessimistic. I would say: To divine Vanke’s future, one must look at its past. The developer has committed the original sin, in that it’s not a state-owned entity.
Perhaps it’s time that the government proves to investors that their perceptions are wrong — that in the distressed debt market, companies offer the same recovery rates, regardless of their ownership types.
[Abridged]
Courtesy Bloomberg/Shuli Ren
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