Hong Kong, January 21, 2020 -- Moody's Investors Service has assigned a B2 senior unsecured rating to
the proposed USD notes to be issued by Scenery Journey Limited and guaranteed
by Tianji Holding Limited (B2 stable).
The proposed notes will also be supported by a deed of equity interest
purchase undertaking and a keepwell deed between Hengda Real Estate Group
Company Limited (Hengda, B1 stable), Tianji, Scenery
Journey, and the bond trustee.
The net proceeds will be used mainly for refinancing and general corporate
purposes.
RATINGS RATIONALE
"The proposed bond issuance will provide Hengda and Tianji with additional
liquidity and lengthen Hengda and Tianji's debt maturity profile,
with limited impact on their credit metrics, because they will use
the proceeds mainly to refinance maturing debt," says Josephine
Ho, a Moody's Vice President and Senior Analyst.
Tianji's B2 corporate family rating (CFR) reflects the company's standalone
credit profile and a one-notch rating uplift, based on Moody's
expectation that Hengda will provide financial support to Tianji in times
of stress.
The one-notch uplift reflects (1) Hengda's full ownership of Tianji,
(2) Tianji's status as the primary offshore platform for Hengda to invest
in property projects and raise offshore funds, and (3) Hengda's
track record of providing financial support to Tianji.
Tianji's standalone credit profile factors in the operational benefits
arising from the company's background as a subsidiary of Hengda,
such as cost efficiencies and a strong brand name. However,
Tianji's rating is also constrained by its weak liquidity and Moody's
expectation of volatility in its sales performance.
Tianji's liquidity position is weak. The company relies on Hengda's
support to maintain its access to funding and liquidity. Its cash
holdings of RMB17.6 billion at 30 June 2019 was inadequate to cover
its short-term debt of RMB70.6 billion. Nevertheless,
Moody's expects that Tianji will have adequate banking facilities
to fund its operations because of Hengda's credit standing and support.
Tianji's EBIT/interest will likely fall to around 1.5x over the
next 12-18 months from 2.1x in 2018, because of increased
interest cost.
On the other hand, Tianji's debt leverage — as measured by
revenue/adjusted debt — will deteriorate to around 25% over
the next 12-18 months from 38% in 2018.
Tianji's stable rating outlook reflects the stable outlook on Hengda's
rating, as well as Moody's expectation that Hengda will provide
financial support to Tianji in times of financial stress.
Moody's expects that Hengda will have the ability to provide support to
Tianji, if needed. Hengda's B1 CFR reflects its status as
an onshore flagship subsidiary of China Evergrande Group (B1 stable),
and as the platform that owns and manages Evergrande's core property development
business in China.
Hengda accounted for 89% of Evergrande's revenue in 1H 2019 and
84% of Evergrande's total reported assets at 30 June 2019.
Hengda's B1 CFR reflects the company's strong market position as
one of the top property developers in China (A1 stable) in terms of contracted
sales and size of land bank. The rating also reflects Hengda's
nationwide geographic coverage, strong sales execution and low-cost
land bank. While Moody's points out that Hengda's liquidity
is weak and its debt leverage is high, Hengda's leverage and
interest coverage are on an improving trend, supported by reduced
land acquisitions.
However, Moody's explains that Hengda's rating is constrained
by its private company status, because information disclosure is
less transparent than that of its listed peers.
The B2 senior unsecured rating of the proposed USD notes reflects Moody's
expectation that Hengda will provide financial support through honoring
its obligations under the Deed of Equity Interest Purchase Undertaking
rather than through a payment guarantee.
The B2 senior unsecured rating is unaffected by subordination to claims
at the operating companies because Moody's expects support from Hengda
to Tianji to flow through the holding company rather than directly to
the main operating companies; thereby mitigating any differences
in expected loss that could result from structural subordination.
Moody's expects that the company's leverage, as measured by revenue/adjusted
debt, to improve to 65%-70% over the next 12-18
months from around 64% in 2018, primarily driven by the company's
controlled land acquisitions.
Meanwhile, Moody's expects Hengda's EBIT/interest coverage
to improve to around 2.8x over the next 12-18 months from
2.6x in 2018.
Hengda's liquidity is weak, with cash/short-term debt standing
at 0.7x at 30 June 2019. Nevertheless, this liquidity
risk is mitigated by the company's track record of accessing diversified
funding channels, including the bank and capital markets for debt
refinancing.
In terms of governance considerations, Moody's has considered the
issue of concentrated ownership, with Evergrande holding 63.5%
of Hengda, and Evergrande in turn 77%-held by its
key shareholders, Hui Ka Yan and his wife, as of 30 June 2019.
Hengda is a private company whose procedures with regard to information
disclosure and corporate governance are less transparent than that of
listed property developers. Part of this governance risk is mitigated
by the fact that Evergrande is a listed company that demonstrates established
internal governance structures and standards, as required under
the Corporate Governance Code for companies listed on the Hong Kong Stock
Exchange.
The stable rating outlook reflects Moody's expectation that Hengda
will deleverage and will be able to refinance its maturing debt over the
next 12-18 months.
The principal methodology used in these ratings 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.
Hengda Real Estate Group Company Limited is among the top property developers
in China by sales volume, with a standardized operating model.
Founded in 1996 in Guangzhou, Hengda has rapidly expanded its business
across the country over the past few years. At the end of 2018,
Hengda's land bank totaled 255 million square meters in gross floor
area.
Hengda is the property arm and the flagship subsidiary of China Evergrande
Group. At 30 June 2019, Evergrande owned 63.5%
of Hengda's shares.
Incorporated in Hong Kong in 2009, Tianji Holding Limited is an
offshore holding company that houses some of Hengda's property projects
in China and overseas, including Hengda's Hong Kong headquarters.
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
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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 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.
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
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
