Hong Kong, March 30, 2012 -- Moody's Investors Service has downgraded Powerlong Real Estate Holdings
Limited's corporate family rating to B3 from B1 and its senior unsecured
rating to Caa1 from B2.
The ratings outlook is negative.
RATINGS RATIONALE
"The downgrade reflects Powerlong's deteriorating liquidity position,
a result in turn of its weak contract sales," says Jiming Zou,
a Moody's Analyst.
Powerlong's contract sales of RMB5.4 billion in 2011 were
much lower than its original target and Moody's expectations.
China's tight credit environment and more caution among buyers are
holding back property investments across the country, including
in those second- and third-tier cities where Powerlong has
shopping malls for sale.
Though Powerlong has a sizeable portfolio of projects for sale in 2012,
it is still facing tepid sales and only recorded about RMB500 million
in contract sales in January and February. Moody's expects
sales to remain weak for 2012.
"The downgrade also considers that Powerlong's cash on hand
is not sufficient to cover its short-term debt and development
needs", says Zou.
Powerlong acquired 6 lots of land (2.4 million sqm in total) for
around RMB4 billion in 2011. Such an aggressive pace of acquisitions
-- in a weakening operating environment -- has resulted
in a lower cash balance, which measured just RMB1.4 billion
in unrestricted cash as of 31 December 2011.
Such a situation means it only has a limited cushion for responding to
adverse changes in the property market.
In addition, a cash balance of this size cannot cover both development
expenditure and the RMB2.44 billion in short-term borrowings
due in 2012.
Powerlong's access to new bank financing is also challenged by its
weak sales performance and the tightness in bank lending to the property
sector.
"In addition, Powerlong's financial flexibility is constrained
by its major shareholder's pledge of shares to meet a collateral
top-up covenant in its borrowings from China Life Insurance Company
Limited," says Zou.
"Currently, Powerlong's deteriorating credit metrics
position it in the lower B rating range," adds Zou.
The company raised a significant level of debt for new project development
in 2011. As a result, its interest expenses rose substantially
to RMB780 million for 2011. EBITDA/interest coverage last year
deteriorated to around 2.2x. Moody's expects interest
coverage will remain under pressure, which will in turn reduce its
financing flexibility.
The negative outlook reflects Powerlong's weak liquidity position and
increased refinancing risk due to the challenges in securing new financing.
A rating upgrade is unlikely at this stage, given the negative outlook.
However, the outlook could return to stable if Powerlong can:
(1) stabilize its debt-funding base through securing new term financing;
(2) improve its security arrangements with respect to the HKD1 billion
loan extended by China Life; or (3) improve its sales performance.
Its ratings could be pressured downwards if: (1) liquidity deteriorates
further due to more weakness in contract sales, or (2) a lack of
headroom in its financial covenants; increased risk of accelerated
repayment of its senior notes due to non-compliance with the change
of control, or (3) it makes further debt-funded land acquisitions.
The principal methodology used in rating Powerlong Real Estate Holdings
Limited was the Global Homebuilding Industry Methodology published in
March 2009. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
Powerlong Real Estate Holdings Limited is a Chinese developer focused
on building large-scale integrated residential and commercial properties
in second- and third-tier cities in China. It has
a development land bank of around 8.4 million sqm in gross floor
area (GFA) in nine provinces, and has eight completed investment
properties.
The company listed on the Hong Kong Stock Exchange in October 2009.
The Hoi family, which is the founder of Powerlong, has an
aggregate stake of 66.36% in the company.
REGULATORY DISCLOSURES
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 30 April
2012. Further information on the EU endorsement status and on the
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Jiming Zou
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
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Peter Choy
Associate Managing Director
Corporate Finance Group
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Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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Moody's downgrades Powerlong to B3; outlook negative
