Hong Kong, March 21, 2022 -- Moody's Investors Service (Moody's) has affirmed Country Garden Holdings Company Limited's Baa3 issuer rating and senior unsecured rating.
At the same time, Moody's has revised the rating outlook to negative from stable.
"The negative outlook reflects our expectation that Country Garden's property sales and profit margins will decline over the next 12-18 months, and offshore funding access will weaken amid difficult operating and funding conditions across the sector," says Celine Yang, a Moody's Vice President - Senior Analyst.
"The rating affirmation reflects the company's good liquidity, and our expectation that Country Garden will maintain its prudent financial management and access to various onshore funding channels," adds Yang.
RATINGS RATIONALE
Moody's forecasts Country Garden's attributable contracted sales will fall 15%-20% to around RMB420 billion–RMB450 billion over the coming 12-18 months, after dropping 2% to RMB558 billion in 2021. This will reduce the company's operating cash flow, liquidity buffer and revenue recognition.
At the same time, the company will likely offer price discounts to support its contracted sales amid the difficult conditions across the sector, thereby pressuring its profit margins. As a result, Country Garden's EBIT/interest coverage will decrease to 4.3x-4.5x over the next 12 -18 months from 4.6x for the 12 months ended June 2021.
Furthermore, Country Garden's offshore funding access has weakened, as reflected by its volatile bond prices. As such, Country Garden will likely need to use its internal resources to repay its maturing debt in at least the coming 3-6 months, which will reduce its operating and financial flexibility. The company's worsening interest coverage and weakened access to offshore funding channel would position the company at the weaker end of the Baa3 rating.
The rating affirmation reflects Moody's expectation that Country Garden will maintain good liquidity. Moody's estimates the company's unrestricted cash declined by around 10% as of the end of February 2022 from RMB167 billion as of the end of June 2021. Although part of the cash would have to be kept at the project level to support its operations, Country Garden will have sufficient resources, including unrestricted cash, operating cash flow and proceeds from recent rights issues, to cover its maturing debt over the next 12 months.
Moody's expects Country Garden to maintain funding access to onshore bank and bond markets to support its operations and adopt a prudent financial policy to preserve its liquidity amid the tight funding environment. The rating agency also expects that the company will not have a substantial materialization of off-balance sheet liabilities that will weaken its liquidity. Any deviation from such expectations will pressure the rating.
Country Garden's Baa3 issuer rating continues to reflect the company's strong brand name, good geographic diversification, good liquidity, as well as a sizable land bank and its track record of developing mass market residential properties in China.
On the other hand, the company's rating is constrained by its low profit margin and large exposure to lower-tier cities where demand can be volatile, as well as weakened offshore funding access.
In terms of environmental, social and governance (ESG) considerations, Moody's has taken into account Country Garden's concentrated ownership by its key shareholder, Yang Huiyan, who held a 59.06% stake in the company as of 31 December 2020. The rating agency has also considered the presence of five independent nonexecutive directors on the company's 13-member board of directors, and the presence of other internal governance structures and standards, as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange. Related-party transactions have been low compared with the company's sales, at around 3%, and dividend payouts have been modest, at around 30%-35% over the past three years.
Country Garden's issuer rating is not affected by the subordination to claims at the operating company level. This is because, despite its status as a holding company with most claims at the operating subsidiaries, creditors of Country Garden benefit from the group's diversified business profile, with cash flow generation across a large number of operating subsidiaries with high geographic diversification. Such business diversification mitigates the structural subordination risk.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if the company's funding access does not improve, sales deteriorate significantly, liquidity weakens, substantial off-balance sheet liabilities materialize, or it undertakes aggressive debt-funded acquisitions that worsen its key credit metrics, such that revenue/adjusted debt drops below 95%-100% or EBIT/interest below 4.5x, on a sustained basis.
An upgrade of Country Garden's ratings is unlikely over the next 12 months, given the negative outlook.
However, Moody's could revise the outlook to stable if Country Garden demonstrates resilience amid difficult operating conditions through improving its funding access, maintaining good liquidity and disciplined financial management, as well as stabilizing its business performance.
Credit metrics indicative of a stable outlook includes revenue/adjusted debt above 120%-125%, EBIT/interest above 4.5x-5.0x and unrestricted cash/short-term debt above 1.5x, all on a sustained basis.
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.
Country Garden Holdings Company Limited (Country Garden), founded in 1992 and listed on the Hong Kong Stock Exchange, is a leading Chinese integrated property developer. As of the end of 2020, the company had an attributable land bank with a gross floor area of 275 million square meters spanning across 289 cities in China.
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.
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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.
YuYing (Celine) Yang
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
