Non-performing loans

Whilst weathering Mainland property developer defaults over the past four years, Hong Kong’s banks have continued to face a challenging credit environment. Hong Kong’s economy has been buffeted by a slowing Chinese economy, the lasting impact of Covid-19 on office demand, shifts in consumer behaviour among local residents and Mainland tourists, and most recently US trade tariff uncertainties. These stresses have had a material impact on Hong Kong’s real estate market, affecting developers, investors, and financial institutions.

In response, the HKMA has actively encouraged banks to support distressed borrowers under the Hong Kong Approach to Corporate Difficulties¹. Unlike previous cycles, widespread enforcements have so far been avoided thanks to strategic forbearance by banks and proactive engagement with customers in refinancing and restructuring discussions. This has helped avoid a downward spiral of forced asset sales in a declining market.

However, refinancings and/or restructurings are only worthwhile if borrowers can generate sufficient and sustainable cash flows to support their debt and provide returns that justify the risk. At present, expectations among stakeholders may often be misaligned in these discussions. Banks remain cautious as limited property sale activity makes it challenging to establish clear collateral values in the current market. Borrowers, by contrast, believe property prices will recover substantially and are often reluctant to sell or inject fresh capital. Despite uncertain cash flows, many borrowers are hesitant to offer upside to existing or alternative creditors who are willing to finance a recovery plan.

Debt restructuring will require stakeholder expectations to adjust so that forbearance is rewarded through upside sharing, and for debt terms to facilitate transfers to new creditors who have different risk-reward expectations. Such structures should preserve collateral priorities, while allowing true surplus collateral to benefit cooperative unsecured creditors. Financial advisors should play a key role in validating asset valuations and cash flow projections, as well as administering cash flow and collateral movements during the restructuring period. This will enable banks to make informed decisions and gain ongoing comfort in preserving their rights and improving their recovery options.