Hong Kong, January 16, 2020 -- Moody's Investors Service has assigned B2 senior unsecured ratings to
the USD notes to be issued by China Evergrande Group (B1 stable).
Evergrande plans to use the proceeds from the proposed notes to refinance
existing debts and for general corporate purposes.
RATINGS RATIONALE
"The proposed bond issuance will provide Evergrande with additional liquidity
and lengthen its debt maturity profile, with limited impact on its
credit metrics as it will use the proceeds mainly to refinance maturing
debt," says Josephine Ho, a Moody's Vice President and Senior
Analyst.
Evergrande's B1 corporate family rating reflects the company's strong
market position as one of the top three property developers in China (A1
stable) in terms of contracted sales and size of its land bank.
In addition, the rating reflects Evergrande's nationwide geographic
coverage, strong sales execution, and low-cost land
bank.
However, Evergrande's rating is constrained by the company's
weak liquidity and high debt leverage. The company's high
risk appetite in expanding its non-property businesses also constrains
its liquidity profile.
Moody's expects that the company's leverage, as measured by revenue/adjusted
debt, will continue to improve to 50%-60% over
the next 12-18 months from around 39% for the 12 months
ended 30 June 2019, primarily driven by slower debt growth from
controlled land acquisitions.
Moody's expects Evergrande will spend around 25% of the contracted
sales proceeds on land acquisitions in 2020.
Moody's has included the RMB130 billion in investments from Evergrande's
strategic investors in its calculation of the company's adjusted debt,
while the company has treated the funds as equity in accordance with Hong
Kong accounting standards.
Meanwhile, Evergrande's EBIT/interest coverage will likely
improve to 2.6x-2.8x in the next 12-18 months
from 2.1x for the 12 months ended June 2019.
Moody's expects Evergrande's contracted sales, including those of
joint ventures and associates, will grow moderately to around RMB625-650
billion in 2020, after registering 9% year-over-year
growth to RMB601 billion in 2019. These contracted sales will in
turn support future revenue recognition.
In addition, Moody's expects Evergrande to maintain its gross
margin around 30%-35% over the next 12-18
months, supported by its low-cost land bank, and providing
it with ample buffer in case of price declines in China's property
market.
Evergrande's liquidity is weak, as cash/short-term debt stood
at 0.8x at the end of June 2019. However, Moody's
believes that the risk is mitigated by the company's track record of accessing
diversified funding channels, including the bank and capital markets
for debt refinancing. The extension of the reorganization and listing
timeline from 31 January 2020 to 31 January 2021, agreed with first
round and second round strategic investors and announced on 13 January
2020, also improved the company's immediate liquidity,
because RMB70 billion in conditional repayment obligations have been postponed
for another 12 months.
In terms of governance considerations, Moody's has considered the
concentrated ownership by Evergrande's key shareholders, Mr.
Hui Ka-Yan and his wife, who held a total 77% stake
in the company at 30 June 2019. This risk is partially mitigated
by Evergrande's established internal governance structures and standards
as required under the Corporate Governance Code for companies listed on
the Hong Kong Stock Exchange. The board has three independent non-executive
directors out of a total nine board of directors.
Moody's has also considered the risk related to new energy vehicle (NEV)
investments. Given that Evergrande's NEV business is at a nascent
stage, it is unlikely to be profitable over the next 12-18
months and will incur additional capital expenditure.
The stable outlook reflects Moody's expectation that Evergrande
will deleverage and be able to refinance its debt over the next 12-18
months.
Moody's could upgrade the ratings if (1) Evergrande demonstrates
improved discipline in its business growth and acquisitions; (2)
its liquidity position improves so that it can meet its refinancing needs
and cover land acquisition costs; and (3) its credit metrics improve.
Financial indicators of a potential upgrade include (1) cash/short term
debt exceeding 1.00x-1.25x; (2) revenue/adjusted
debt exceeding 70%-75%; and (3) EBIT/interest
exceeding 2.5x-3.0x, all on a sustainable basis.
On the other hand, Moody's could downgrade the ratings if
(1) Evergrande embarks on aggressive acquisitions and a high-growth
strategy; (2) it fails to deleverage; (3) liquidity weakens;
or (4) there is a material reduction in the ownership of its subsidiaries,
including Hengda Real Estate Group Company Limited (B1 stable).
Financial indicators of a potential downgrade include (1) cash/short term
debt below 1.0x; (2) revenue/adjusted debt below 50%;
and (3) EBIT/interest below 2.0x on a sustained basis.
The principal methodology used in this rating was Homebuilding And Property
Development Industry published in January 2018. Please see the
Rating Methodologies page on www.moodys.com for a copy of
this methodology.
China Evergrande Group is among the top three residential developers in
China by sales volume, with a standardized operating model.
Founded in 1996 in Guangzhou, the company has rapidly expanded its
business across the country over the past few years.
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
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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
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Disclosures for each credit rating action under the ratings tab on the
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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.
Josephine Ho
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
Kaven Tsang
Senior Vice President
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