Chinese property developer Shimao faces debt troubles, leading Moody's to downgrade its credit rating.

• On Wednesday, Moody's downgraded Shimao's rating by two notches, from B2 to Caa1, and changed its outlook from "ratings under review" to negative.
• As contracted sales decline and the developer requires funds to maintain ongoing projects, the ratings agency anticipates that Shimao may struggle to repay investors on schedule.
• Last week, S&P Global Ratings announced that the auditors for Hopson Development Holdings, a subsidiary of real estate developer Shimao, and China Aoyuan Group resigned in late January.

Moody's downgraded a Chinese property developer on Wednesday due to anticipations that the company will face challenges in meeting its payment obligations to investors.

Despite recent local government efforts to boost homebuying in China's real estate sector, ongoing issues persist.

Shimao's rating has been downgraded by two notches from B2 to Caa1 by Moody's, which now has a negative outlook on the developer after a ratings review that started on Jan. 10.

Beijing's debt requirements were met by Shimao, making it one of China's healthiest property developers. However, Evergrande, a highly indebted global investor, caused concerns last year about its ability to repay its debt and the potential impact on China's economy if it failed.

Shimao has also disclosed its own debt issues, like other real estate developers.

The company's prospects for future income have fallen after it defaulted in early January and contracted sales for 2021 dropped by 10.4% from the prior year to 269.11 billion yuan ($42 billion).

Significantly declining sales are predicted by Moody's for this year and the next. Due to the need for repaying project-level debt and construction expenses, Shimao will mostly use any available cash, leaving insufficient funds for paying back investors this year.

The ratings agency stated in a release that Shimao has significant debt maturities approaching due or puttable by the end of 2022, including offshore bank loans, offshore bonds worth approximately $1.7 billion, and onshore bonds of around RMB6.9 billion.

Auditor resignations

Last week, S&P Global Ratings announced that the auditors for Shimao's mainland China subsidiary, China Evergrande, and China Construction resigned in late January.

Rare resignations could hinder Hong Kong-listed developers from submitting financial statements before the March deadline, according to Edward Chan, director at S&P Global Ratings, who spoke in a phone interview Monday.

A delay in filing could result in stock trading suspensions, Chan said, which would further weaken investors' confidence.

In January, Shimao's Hong Kong-listed shares experienced a 12% increase after months of selling, but have since fallen by more than 6% in February. Similarly, Aoyuan shares ended a months-long sell-off with 10% gains in January, but have decreased by approximately 7% this month.

This month, Hopson shares have experienced a slight decline of 1%, resulting in a slight drop in their value.