The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Corrects paragraph four to state that Sonia Cheng sits on the board of HSBC’s Asia-Pacific subsidiary. Writes out billion in paragraph one.

By Ka Sing Chan

HONG KONG, May 21 (Reuters Breakingviews) - HSBC HSBA.L and its fellow lenders have a task ahead of them with New World Development 0017.HK. The money-losing Hong Kong property group wants to refinance $11 billion of loans, but CEO Echo Huang has yet to reverse a four-year revenue slump. The banks have to weigh up the borrower's problems against the pain a default could inflict on the rest of their property exposure in the city.

The shrinking top line forced the troubled developer to report its first net loss in two decades last year. There's likely to be a repeat this year: in February, less than three months after taking over as CEO, Huang had to unveil a six-month net loss of HK$6.6 billion ($852 million) as the continuing property slump and high interest costs ate into its bottom line. Its total debt amounted to HK$146 billion by the end of 2024, against HK$22 billion of cash.

Over the past couple of years, as the Federal Reserve was raising interest rates, banks had been calling in property loans. That prompted the city's regulators to step in with relief measures for borrowers, especially those from small and medium enterprises.

Dealing with a well-connected corporate giant like New World is a different affair. Blue-chip developers and the families who control them have ranked as local banks’ most important clients for decades. Sonia Cheng, daughter of New World Chair Henry Cheng, sits on the board of HSBC’s Asia-Pacific subsidiary as an independent non-executive director.

The bank run by Georges Elhedery had more than $33 billion in Hong Kong commercial property loans on its books at the end of 2024. Some $3.2 billion of such debt was classified as credit impaired as of June last year, a six-fold jump in six months. Elhedery, though, told his shareholders in February that future credit losses on it were unlikely to be big.

Nonetheless, a default by New World, one of the traditional big four developers of the finance hub, would send shockwaves to investors and jar lenders’ property exposure further.

The good news is the property market outlook has improved as interest rates are easing. This week, Hong Kong's one-month interbank rate dipped below 1% for the first time in three years.

HSBC and Bank of China 601988.SS have pledged to take part in New World’s refinancing deal, per Debtwire, one of the biggest of its kind in Hong Kong’s corporate history. How this saga unfolds will affect not just New World’s creditworthiness but also the general health of Hong Kong’s economic pillar.

CONTEXT NEWS

Hong Kong property group, New World Development, has asked banks to refinance HK$87.5 billion ($11.2 billion) of its loans by the end of June, Bloomberg reported on May 21, citing unnamed people familiar with the matter.

(Editing by Antony Currie; Production by Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))