Hong Kong, April 13, 2022 -- Moody's Investors Service has affirmed CIFI Holdings (Group) Co. Ltd.'s Ba2 corporate family rating (CFR) and Ba3 senior unsecured ratings.
At the same time, Moody's has revised the rating outlook of CIFI to negative from stable.
"The negative outlook reflects our expectation that CIFI's property sales will decline over the next 12-18 months amid difficult operating conditions, which will weaken the company's operating cash flow and credit metrics," says Cedric Lai, a Moody's Vice President and Senior Analyst.
"The rating affirmation reflects our expectation that CIFI will maintain good liquidity and a disciplined approach to its business and financial management," adds Lai.
RATINGS RATIONALE
Moody's expects CIFI's contracted sales will decline to around RMB185 billion in 2022 and 2023 amid difficult operating and funding conditions. The company's contracted sales fell 49% and 29% in the first quarter of 2022 and fourth quarter of 2021 compared with the same periods in the prior year, respectively.
The company will also likely offer price discounts to support its contracted sales, thereby pressuring its profit margins.
Consequently, Moody's expects the company's credit metrics to deteriorate. Specifically, its debt leverage, as measured by revenue/adjust debt, will reduce to 70%-75% from 82% in 2021 driven by the expected revenue decline during the period. In addition, its EBIT/interest coverage, will fall to 3.0x over the next 12-18 months from 3.6x in 2021 because of an expected decrease in profit margins and revenue over the period. These ratios will position the company at the weaker end of its Ba2 CFR.
However, Moody's expects CIFI to maintain good liquidity. The company will have sufficient resources, including unrestricted cash and operating cash flow, to cover its maturing debt over the next 12 months. As of the end of 2021, its unrestricted cash/short-term debt coverage remained good at 1.9x.
CIFI's Ba2 CFR reflects the company's ability to execute its property development strategy, which is focused on catering to mass-market housing demand in key tier 1 and tier 2 cities. This focus helps the company achieve a rapid asset turnover.
The rating also takes into account the company's good liquidity, expanding scale and diversified geographic coverage. At the same time, CIFI's credit profile is constrained by its moderate debt leverage and material exposure to its joint venture (JV) businesses, which hinders the transparency of its credit metrics, although this is mitigated by the good reputation of its JV partners.
The Ba3 senior unsecured debt rating is one notch lower than the CFR due to structural subordination risk. The majority of CIFI's claims are at its operating subsidiaries and have priority over claims at the holding company in a liquidation scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. Consequently, the expected recovery rate for claims at the holding company will be lower.
In terms of environmental, social and governance (ESG) factors, Moody's has taken into account CIFI's concentrated ownership. Its controlling shareholders, Lin Zhong and his family members, collectively held a 55.5% stake in the company as of 31 March 2022. Moody's has also considered (1) the fact that the company's audit and remuneration committees comprise independent non-executive directors who maintain oversight of the company; (2) the application of the Listing Rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance in Hong Kong SAR, China to oversee related-party transactions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of CIFI's ratings is unlikely over the next 12 months, given the negative outlook.
However, the outlook could be revised to stable if CIFI improves its contracted sales, credit metrics and liquidity.
Credit metrics that could indicate a stable rating outlook include EBIT/interest coverage above 3.5x and revenue/adjusted debt above 70%-75% on a sustained basis.
Moody's could downgrade CIFI's ratings if the company's contracted sales, profitability, credit metrics or liquidity weaken or the company pursues aggressive expansion.
Credit metrics indicating a downgrade include EBIT/interest coverage falling below 3.0x-3.5x, revenue/adjusted debt decreasing below 65%; or its liquidity weakens, as reflected by unrestricted cash/short-term debt declining below 100%.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
CIFI Holdings (Group) Co. Ltd. (CIFI) was founded in 2000 and incorporated in the Cayman Islands in May 2011. It listed on the Hong Kong Stock Exchange in November 2012. As of 31 March 2022, it was 55.5% owned by the Lin family.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Cedric Lai
Vice President - Senior 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.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Franco Leung
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
