Hong Kong, January 21, 2021 -- Moody's Investors Service has assigned a B1 rating to Sunac China
Holdings Limited's (Ba3 stable) proposed senior unsecured USD notes.
The company plans to use the proceeds from the proposed notes to refinance
existing debt.
RATINGS RATIONALE
"Sunac's Ba3 corporate family rating (CFR) reflects the company's
strong sales execution, leading brand and market position in China's
Tier 1 and Tier 2 cities, its good quality land bank, and
its adequate liquidity profile, driven by its rapid asset turnover
business model," says Danny Chan, a Moody's Assistant
Vice President and Analyst.
"However, the company's rating is constrained by its
improving but still modest credit metrics, and high exposure to
joint-venture (JV) businesses, which weakens corporate transparency,"
adds Chan.
The proposed notes will lengthen Sunac's debt maturity profile and will
not have a material impact on its credit metrics, because the proceeds
will be used to refinance its existing debt.
Moody's expects Sunac's credit metrics will improve in the next
12-18 months, driven by a likely slowdown in debt growth
given tight credit conditions for Chinese property developers.
In particular, Moody's expects Sunac's revenue/adjusted debt will
improve to 65%-70% over the next one to two years
from around 46% for the 12 months ended June 2020. This
projection includes the company's growing revenue as a result of its strong
contracted sales over the past two years.
Similarly, the company's interest-servicing ability,
as measured by adjusted EBIT/interest coverage, will improve towards
3.0x from around 2.1x over the same period.
Moody's expects Sunac's contracted sales to increase slightly to
RMB600 billion -- RMB630 billion in 2021 and 2022, supported
by good quality land resources, as well as its strong brand name
and sales execution. Sunac's gross contracted sales grew 3%
to RMB575 billion in 2020 from the previous year, despite the impact
from the coronavirus outbreak.
The B1 rating on the proposed notes reflects the risk of structural subordination,
given the fact that the majority of claims are at the operating subsidiaries
and have priority over claims at the holding company in a bankruptcy scenario.
In addition, the holding company lacks significant mitigating factors
for structural subordination, reducing the expected recovery rate
for claims at the holding company level.
Sunac's liquidity is adequate. Its cash holdings of around RMB121
billion as of 30 June 2020 largely cover its short-term debt of
RMB141 billion. Moody's expects the company's cash holdings and
likely operating cash inflow to cover its committed land purchases,
dividend payments, as well as capital spending and payables for
its previous acquisitions, over the next 12-18 months.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the concentrated ownership of Sunac, its
history of making sizable acquisitions and investments, and significant
investments in joint ventures (JVs). Moody's has also considered
the presence of four independent nonexecutive directors on the board,
who also chair the audit and remuneration committees; and the presence
of other internal governance structures and standards as required under
the Corporate Governance Code for companies listed on the Hong Kong exchange.
Moody's regards the impact of the deteriorating global economic outlook
amid the rapid and widening spread of the coronavirus outbreak as a social
risk under its ESG framework because of the substantial implications for
public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on Sunac's CFR reflects Moody's expectation that the
company will maintain stable sales, improve its revenue, control
its investments in non-property businesses and maintain its leverage
over the next 12-18 months.
Upward rating pressure could emerge if Sunac: (1) is able to exercise
restraint in its non-core business investments; (2) maintains
its solid liquidity position; and (3) improves its credit metrics,
such that its adjusted revenue/debt rises above 70%-75%
and adjusted EBIT/interest rises above 3.0x-3.5x
on a sustained basis.
A significant reduction in contingent liabilities associated with joint
ventures (JVs) could also be positive for the ratings. This could
be a result of reduced usage of JVs or material improvement in the financial
strength of its JV projects.
However, Moody's could downgrade the ratings in case of: (1)
a material decline in its contracted sales; (2) a weakening in its
liquidity position; (3) substantial investments in non-property
development businesses; or (4) a weakening in credit metrics,
such that its adjusted revenue/debt falls below 50%-60%
and adjusted EBIT/interest drops below 2.0x-2.5x
on a sustained basis.
Downward rating pressure could also increase if the company's exposure
to contingent liabilities associated with JVs increases materially.
This could be a result of a material deterioration in the financial strength
and liquidity of its JV projects or a substantial increase in investment
in JV projects.
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.
Listed on the Hong Kong Stock Exchange on 7 October 2010, Sunac
China Holdings Limited is an integrated residential and commercial property
developer with projects in China's main economic regions. The company
develops a diverse range of properties, including high-rise
and mid-rise residences, detached villas, townhouses,
retail properties, offices and car parks.
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to Assumptions in the disclosure form. Moody's Rating Symbols and
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Danny Chan
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
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
