Not so much because Moody's and S&P on Wednesday downgraded two more companies in the sector to the verge of selective default, but more that some smaller companies face looming maturities just when their cash levels have been depleted and markets remain closed to them, making refinancing a tricky, if even possible, exercise.
And there's more. If these companies go into restructuring - and a handful of them seem to be clearly heading down that path - the recovery level on their bonds is far from clear. While most do have tangible assets, argue analysts, the true value these assets could fetch in a liquidation sale is highly questionable.
Not to mention that the value of property - the bulk of these assets - in general is trending down in China. "Much of what these companies own are landbanks and if you see a drop in land prices those values could drop too," said an analyst in Singapore. He added that, as it is, the value on balance sheets of these properties is questionable.
To complicate matters, there is little precedent for investors to work with. There has been a short-term workout by Greentown China and Neo China once missed a coupon which it later met. But a proper restructuring of a Chinese company is yet to be seen. Yet one thing is for sure: if a liquidation does come about, there will be little left for bondholders.
For starters, it is not even clear how bondholders would be able to get their hands on the assets anyway, given there is very little clarity on the outcome of a still unobserved Chinese restructuring.
But even if Western restructuring laws were to be used, the recovery value looks dismal. One analyst explained that most of the debt of these companies is owed locally. And onshore bank loans are senior to offshore bonds. Most bank debt is also secured which means it too would be senior to bonds.
All these technical questions could, though, soon be answered. A handful of the more distressed companies in the sector are facing large redemptions this year and are burning quickly through the little cash they have in hand.
Greentown, for one, faces a couple of large payouts in the first two weeks of May. The company's stock shot up 18% in the past month as officials announced a series of key sales of subsidiaries aimed at reducing indebtedness and maintaining its aggressive growth.
A credit analyst in Singapore had a very different take on that, however: "When you see a company selling assets to meet debt, that should be cause for concern."
Even with the sales it seems like the company could have a hard time staving off a debt workout. According to a recent report by Jefferies, Greentown reported cash holdings of Rmb5.9bn (US$936.9m) by end-2011. However, it has Rmb16bn in short-term debt due this year. And on May 8 it has a US$1.74m coupon payment followed by a Rmb178m puttable convertible bond redemption on May 18.
Hopson seems to be in even more serious trouble. The company faces maturities of HK$13.63bn (US$1.76bn) in the next 12 months while it holds only HK$2.6bn in cash. Part of its maturing debt includes a US$350m dollar bond due in November. Unless its sales increase in leaps and bounds - which seems unlikely given that they have actually been dropping - or the company sells a good chunk of its landbank and other assets, it seems unlikely to be able to meet that redemption.
Ratings agencies seem to have finally cottoned on. On Tuesday, S&P downgraded both Hopson Development and Glorious Property to B and kept them on Credit Watch negative.
On the latter, S&P noted that the company only has enough liquidity to meet its basic needs over the next twelve months, when it has some Rmb9.3bn maturing. According to the agency, the most Glorious can scrape up is some Rmb3.6bn, which includes drawing down all of its Rmb1bn bank lines. Seems like it could soon be the target of some inglorious adjectives from creditors.
Curiously, though, bondholders still seem to have faith in these companies. Hopson's 2012 bonds were quoted at 93.50 on Wednesday, Greentown 2013s were trading at 85.00, and Glorious 2015s were at 83.00. All these levels seem to suggest a smaller chance of default and a higher recovery than implied by the company's numbers.
"So far the wider market has been so upbeat that these bonds have had a stay of execution," speculated the Singapore analyst. "But as soon as the market weakens, these guys could gap."