New World Development Co. Ltd.'s coupon deferral is a complication for a handful of hybrid investors today. Tomorrow, it may become a headache for the oversupplied Hong Kong property market. It could trigger cascading effects where homebuyers lose confidence and delay purchases.

The end result may be our downside scenario for the Hong Kong property market: home prices drop 5%-7% this year.

New World (unrated) recently chose not to call a perpetual bond, deferred hybrid coupon payments and launched a project at competitive prices. The actions stoked market concerns about the liquidity of the developer, one of Hong Kong's largest.

Investors are asking us how the New World events may hit appetite among homebuyers and banks' willingness to lend. We address their main queries below.

Frequently Asked Questions

What happened?

New World in May chose not to call a US$345 million perpetual bond. The non-call event will trigger a step-up in the coupon in mid-June to about 10% from 6.15%.

On May 30, 2025, the company announced that it would defer coupon distributions on four senior perpetual bonds at the next distribution dates. This move heightened investors' concerns about the company's liquidity.

Press reports that New World has yet to finalize refinancing of HK$87.5 billion in syndicated bank loans have likely added to investor misgivings.

What market concerns may arise from the deferral of coupon payments on perpetual bonds?

New World's decision to not call the instrument and then to defer distributions surprised some investors, we believe.

Such instruments generally give issuers the flexibility to push back payment of principal and coupons indefinitely. This may allow an issuer to conserve cash or absorb losses without causing a legal default or liquidation.

However, investors typically expect issuers to pay coupons on hybrid instruments, and to redeem such instruments on the first call date, or the date of the first coupon step-up.

Accordingly, some investors may view New World's decision to defer coupon payments as a sign the company is experiencing liquidity strains.

Issuers are generally reluctant to defer payment on their hybrids to avoid sending such a signal to markets. Indicatively, through mainland China's prolonged property downturn, we have seen just a handful of mainland Chinese developers use such flexibility in their outstanding hybrid issuance.

These developers chose not to call their perpetual instruments, thus absorbing a high coupon step-up, to preserve liquidity (see "China Developers To Investors: That Perpetual Bond May Be Meant To Last," Aug. 2, 2022).

We typically rate hybrid instruments below straight bonds from the same issuer. This reflects subordination risk and the issuer option to defer coupon payments.

How do we view the deferral of payment on hybrid capital instruments?

We generally view a hybrid payment deferral as act of cash conservation and therefore positive for the ratings, if any, on the issuer and on its senior debts.

That's why we sometimes recognize equity content on hybrid capital instruments. We believe they can be used to conserve cash or absorb losses upon stress. The deferral of coupon does not lead to the lowering of the issuer credit rating to 'D' or 'SD' if the deferral is according to terms of the instrument.

On the other hand, upon the hybrid coupon deferral, we lower the issue credit rating on the hybrid to 'D' unless we expect repayment to occur within our timeliness standards. Our timeliness standards depend on whether the deferral is cumulative or not.

For deferral of coupon payments on a cumulative basis (where the issuer is obliged to pay deferred coupons in the future), we would lower the issue rating to 'D' unless we expect payment will be made on or before the first anniversary of the deferral date and in accordance with terms.

For deferral of coupon payments on a non-cumulative basis (where the issuer is not obliged to pay deferred coupons in the future), our typical timeliness standard is five business days. This means we would typically lower the instrument's issue rating to 'D' unless we expect repayment will be made within five business days of the deferral date.

Will New World's actions cause us to change our forecast for the Hong Kong residential market?

We believe homebuyers may push back their purchases in expectation of a flow of discounted homes from New World. The developer's most recent launch of Deep Water Pavilia in Wong Chuk Hang had an average price per square foot at about plus 2% to minus 8% compared with the adjacent Blue Coast project launched by CK Asset Holdings Ltd. (A/Stable/--) in 2024, regardless of unit type.

If such price-cutting spreads to the wider market, we may we need to revise downward our expectation that Hong Kong home prices will stay flat this year.

The Hong Kong residential market remains oversupplied, and any slippage of demand will hit home prices. Under such a scenario Hong Kong property prices may move toward our downside scenario: a 5%-7% drop this year (see "Distress Event Could Derail Hong Kong's Home-Price Stabilization," Feb. 5, 2025).

Hong Kong's primary completed and unsold inventory stood at 28,000 units as at end-March 2025 according to the Housing Bureau. That is far greater than the 21,108 homes sold in Hong Kong in 2019, one of the best years for primary residential unit sales in recent history.

Furthermore, developers are still building. According to Hong Kong's Rating and Valuation Department, primary home completions will reach 20,862 units in 2025 and 20,098 units in 2026.

What are the credit implications for Hong Kong developers?

We believe property developers will prioritize cash flow over margins amid the supply overhang and demand uncertainties.

Developers will continue to sell projects at competitive prices to achieve higher sell-through levels, we assume.

Even rated developers that are among the most reputable in the sector will likely adopt this approach to sustain project sell-through rates. They will thus grab market share but will do so at reduced margins.

For instance, Sun Hung Kai Properties Ltd. (A+/Negative/--) has sold 1,520 units at its Sierra Sea in Sai Sha since launch of the project in May, representing a sell-through rate of 96.5%. The average selling price (ASP) of the project was around HK$11,000-HK$12,000 per square foot, representing more than a 20% discount to the price of comparable nearby homes listed in the secondary market.

Elsewhere, The Henley in Kai Tak--built by Henderson Land (unrated)--comprises units with ASPs 18% lower than previous launches. The firm achieved a 98% sell-through.

At the same time, we expect rated developers will tightly control debt levels, largely by curtailing spending on land and other investments to counter rising leverage (debt-to-EBITDA) stemming from margin compression.

Table 1

Do we expect funding conditions to tighten for Hong Kong developers?

The funding access of Hong Kong developers will be increasingly polarized, in our view. We believe banks will reserve lending for higher-quality names.

Rated firms have strong liquidity; a market shock would not affect their access to bank funding, we believe. Certain unrated entities of a high standing in the market would also likely maintain access to sizable syndicated bank loans.

For example, Chinachem Group (unrated) was recently able to sign a five-year HK$8 billion syndicated bank loan.

Developers with weak liquidity that are not able to get unsecured bank loans may need to pledge their assets for financing. This would raise the subordination risks of bondholders, who hold unsecured debt.

How will the strains in the Hong Kong property sector affect banks?

Banks, particularly big institutions, will be largely resilient. Their diversified loan portfolio, adequate collateral and reasonable underwriting standards should protect them through this downturn.

Smaller banks with concentrated exposure to highly leveraged developers or nonprime properties will likely come under more pressure.

In our base case, we expect the nonperforming loan (NPL) ratio of Hong Kong banks' to rise to about 2.0%-2.5% over the next two years, up from 1.96% at end-2024. We assume this increase will mainly flow from strains in the Hong Kong commercial real estate (CRE) market.

Hong Kong banks' credit-loss ratio will likely inch up to around 60 basis points (bps) in 2025-2026, from 55bps in 2024. We estimate that 60%-70% of CRE loans from major banks are secured, with a loan-to-value ratio at 45%-55% as of end-2024. This should provide a reasonable buffer against credit events.

Even if Hong Kong banks have to weather credit events involving a large developer, we expect the impact on the Hong Kong banking sector will remain manageable. Hong Kong regulators limit banks' exposures to a single group. Additionally, banks have generally good operating profitability to absorb credit costs and strong capital buffers to weather the property downturn.

Hong Kong banks' operating profit before impairment charges to average assets was about 1.2% at the end of 2024. Their common equity Tier 1 capital ratio stood at 19.8% at the end of March 2025. However, our stress scenario (a credit event involving a major Hong Kong developer) holds that the sector's NPL ratio would likely spike, and that some banks would see severe pressure on profit.

We also expect banks' mortgage loan portfolio will remain resilient even if home prices declined 5%-7% (i.e. the downside scenario). Banks typically employ robust underwriting standards and strong risk controls on such loans.

Hong Kong's home prices have fallen by nearly 30% from the recent peak in 2021. However, this decline hasn't significantly affected banks. The delinquency ratio--as measured by 90 days past due--for residential mortgage loans was at a very low level of 13bps as end-April 2025.

Will the recent decline in one-month Hibor support demand for residential properties?

We believe a sustained lowering of mortgage rates could support demand, as the cost of owning a property comes down. It might also stimulate investment demand. The average gross rental yield of about 3.5% for private residential units in Hong Kong is now greater than the cost of mortgages, representing a positive carry for home purchases.

Hong Kong's mortgage rates are typically based on one-month Hibor plus 1.3%, or prime rate minus 1.75%. As such, the current effective mortgage rate has dropped to around 1.9% from 3.5% a month ago thanks to the retraction of Hibor.

One-month Hibor fell to as low as 0.55% in June 2025 from over 4% two months prior. This was driven by a recent influx of liquidity into the Hong Kong banking system.

Chart 1

However, in our view, the recent drop in Hibor may not be sustainable. This is because large differentials between U.S. rates and Hong Kong rates could lure investors to engage in carry trade (borrowing in Hong Kong dollars at low interest rates to buy high-yield dollar assets).

Such carry trade should theoretically narrow the rate differential between borrowing in Hong Kong dollars versus U.S. dollars. This would cause Hibor to rise.

How will the recent drop in Hibor affect bank earnings?

The drop will likely squeeze banks' net interest margins (NIM). We anticipate the sector's NIM will decline 10bps in 2025 and an additional 8bps in 2026, from 1.26% in 2024.

The squeeze on NIM is driven by the sector's large pool of current and saving accounts (CASA) and the timing difference in the repricing of loans and time deposits.

Banks cannot cut their CASA interest rate below zero to match the sharp drop in rates for their Hibor-based loans. In addition, about 90% of residential mortgages are benchmarked against Hibor and are repriced monthly; time deposits are typically repriced gradually over a three- to six-month period.

However, the reduction in interbank rates will alleviate the loan-service burden on borrowers and, in turn, the pressure on banks' asset quality.

If low interbank rates persist, mortgage loan growth should mitigate some of the earnings pressure. Moreover, we expect falling rates will encourage depositors to shift into wealth management products, generating fee income for banks.

Editor: Jasper Moiseiwitsch

Related Research

• Hong Kong Banks And Property: Mapping The Contagion Effects, March 5, 2025
• Distress Event Could Derail Hong Kong's Home-Price Stabilization, Feb. 2, 2025
• China Developers To Investors: That Perpetual Bond May Be Meant To Last," Aug. 2, 2022
• Credit Implications Of Hybrid Noncall Decisions, Nov. 24, 2022