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.
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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
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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
