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Rating Action:

Moody's assigns B1 to China Grand Auto's new senior unsecured notes

 The document has been translated in other languages

09 Oct 2019

Hong Kong, October 09, 2019 -- Moody's Investors Service has assigned a B1 senior unsecured rating to the proposed USD notes to be issued by China Grand Automotive Services Limited — a directly wholly owned subsidiary of China Grand Automotive Services Group Co., Ltd (China Grand Auto, B1 stable) — based on the unconditional and irrevocable guarantee provided by China Grand Auto.

The rating outlook is stable.

The bond rating reflects Moody's expectation that China Grand Automotive Services Limited will complete the bond issuance upon satisfactory terms and conditions, including proper registrations with the National Development and Reform Commission and the State Administration of Foreign Exchange in China (A1 stable).

Proceeds from the proposed notes will be used by China Grand Auto to refinance its existing indebtedness and for general corporate purposes.

RATINGS RATIONALE

On 9 October 2019, China Grand Auto announced exchange offers for any or all of the company's outstanding existing notes due in February 2020 with an outstanding principal amount of about USD300 million, and also perpetual securities with an outstanding principal amount of about USD400 million. The exchange offers will expire on 21 October 2019.

Under the offer, for each USD1,000 principal amount of the outstanding existing notes due in February 2020, noteholders will receive 105% of the in aggregate principal amount of the proposed notes, a 3.5% existing notes cash paydown, and accrued interest. For each USD1,000 principal amount of the outstanding existing perpetual securities, holders will receive the existing senior unsecured notes due in 2022 issued by China Grand Automotive Services Limited, as well as accrued interest.

Moody's does not regard this exchange offer as a distressed exchange — which is considered a default event under Moody's definition — because the holders will not incur economic loss, given that the exchange offer is at/above the par value of the existing notes.

The company is also expecting to conduct a concurrent offering of new notes.

"The proposed notes issuance will not impact China Grand Auto's B1 corporate family rating or the stable outlook on the rating, because most of the proceeds will be used to refinance the company's existing debt," says Roy Zhang, a Moody's Assistant Vice President and Analyst.

"In fact, the proposed notes will improve China Grand Auto's debt maturity profile," adds Zhang, who is also Moody's Lead Analyst for China Grand Auto.

Moody's expects that China Grand Auto's leverage will remain at around 5.5x-6.0x over the next 12-18 months compared with 5.9x at the end of 2018, reflecting slower earnings growth and stable debt when compared with 2018.

China Grand Auto has proven its business resilience during the current industry downturn. Its year-on-year unit sales of new vehicles grew by 6.1% and revenue by 3% in 1H 2019, despite the 12.4% overall decline of auto sales in China during the same period, according to the China Association of Automobile Manufacturers.

Moody's believes this strong performance is underpinned by the company's large and diversified operating scale and favorable brand exposure to high-end markets. These strengths, combined with increasing profit contributions from high-margin services and commission-based business, have all improved the company's operating stability.

At the same time, China Grand Auto relies heavily on short-term debt, resulting in a weak liquidity profile. At 30 June 2019, its restricted and unrestricted cash pool of RMB20.3 billion was insufficient to cover its short-term debt. Moody's expects that the company's financing cost will rise, as it refinances its existing debt at higher interest rates.

Nevertheless, Moody's also says that the company will be able to rollover its debt, given its profitable operations, strong market position and inventory of branded cars.

The company has also demonstrated a track record of access to diversified funding channels, including onshore debt instruments, such as corporate bonds, medium-term notes, syndicated loans and asset-backed securities.

In addition, its strategic relationships with auto makers and highly liquid working capital provides it with a buffer against liquidity needs.

China Grand Auto's senior unsecured bond rating for the proposed USD notes is unaffected by subordination to claims at the operating company level, because such claims are not material, based on Moody's expectation that the majority of claims will remain at the holding company level. At the same time, creditors at China Grand Auto benefit from the group's highly diversified business profile — with cash flow generation across a large number of operating subsidiaries — and which mitigates structural subordination risk.

The rating also takes into account the following environmental, social and governance considerations.

The company benefits from the social trend of increasing car ownership in China. This trend is supported by China's improving infrastructure, rising disposable incomes and urbanization rate.

The company faces regulatory risks related to vehicle ownership controls, vehicle fuel economy and emission standards, as well as risks stemming from its financial services and used-vehicle sales. Any further tightening of related regulations could hamper sales.

China Grand Auto's ownership is concentrated in Xinjiang Guanghui Industry Investment (Group) Co., Ltd (B2 stable), which held a 32.73% stake in the company at 21 September 2019. This risk is somewhat mitigated by the fact that China Grand Auto is a listed and regulated entity, with minimal intercompany transactions with Xinjiang Guanghui.

The stable ratings outlook takes into account Moody's expectation that China Grand Auto will maintain its leading market position and stable level of debt leverage, and can refinance its short-term debt.

Upward ratings pressure could emerge, if China Grand Auto maintains its business profile and access to diversified funding sources, and refinances its short-term debt, while improving on a sustained basis, (1) its debt leverage; and (2) the contribution of revenue and gross profit from its auto maintenance business.

Credit metrics indicative of upward ratings pressure include adjusted debt/EBITDA trending towards 5.0x-5.5x, and interest coverage as measured by EBITDA/interest exceeding 3.0x; both on a sustained basis.

On the other hand, downward ratings pressure could emerge if China Grand Auto's (1) business profile weakens; (2) revenue and/or margins decline due to deteriorating market conditions or the termination of contracts with vehicle suppliers; (3) liquidity position or funding access weakens; or (4) interest coverage — as measured by EBITDA/interest — falls below 2.5x, or its leverage rises above 6.0x on a sustained basis.

The principal methodology used in this rating was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 2006, China Grand Automotive Services Group Co., Ltd is listed on the Shanghai Stock Exchange and was 32.64% owned by the unlisted Xinjiang Guanghui Industry Investment (Group) Co., Ltd (B2 stable) at 30 June 2019.

REGULATORY DISCLOSURES

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.

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.

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.

Roy Zhang
Asst Vice President - 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

Clement Cheuk Yiu Wong
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

No Related Data.
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