Hong Kong, July 16, 2019 -- Moody's Investors Service has assigned a B2 rating to Powerlong Real Estate
Holdings Limited's (B1 stable) proposed senior unsecured USD notes.
Powerlong plans to use the proceeds from the proposed notes mainly to
refinance its existing indebtedness.
RATINGS RATIONALE
"The proposed bond issuance will improve Powerlong's liquidity profile
and will not materially affect its credit metrics, because the company
will use the proceeds mainly to refinance existing debt," says Cedric
Lai, a Moody's Vice President and Senior Analyst, and also
Moody's Lead Analyst for Powerlong.
Moody's expects that Powerlong's rental income will grow 20%-25%
annually to around RMB1.4 billion in 2019 and RMB1.8 billion
in 2020 from RMB1.1 billion in 2018, underpinned by its scheduled
opening of new retail malls. The company plans to open seven retail
malls in the second half of 2019.
As a result, Powerlong's adjusted rental income/interest coverage
will improve to around 40% over the next 12-18 months from
36% in 2018.
Moody's also expects that Powerlong's adjusted EBIT/interest will slightly
improve to around 2.6x over the next 12-18 months from 2.5x
in 2018, while adjusted debt/adjusted capitalization will stay largely
stable at around 58% over the same period.
Powerlong's contracted sales were strong over the past two years.
In the first half of 2019, Powerlong, together with its joint
ventures and associates, achieved strong year-on-year
growth in contracted sales of 79% to RMB29.2 billion,
after recording 97% year-on-year growth to RMB41
billion in 2018. The strong contracted sales will underpin the
revenue growth of the company in the next 12-18 months.
Powerlong's B1 corporate family rating reflects its (1) track record of
developing and selling commercial and residential properties; (2)
increasing recurring revenue, which improves the stability of its
debt servicing; and (3) expansion into higher-tier cities
in China where demand for its properties is more favorable.
However, its credit profile is constrained by execution risk,
the high level of capital required for its business strategy, and
high debt leverage.
The B2 senior unsecured debt rating is one notch lower than the corporate
family rating due to structural subordination risk.
This risk reflects the fact that the majority of claims are at the operating
subsidiaries and have priority over Powerlong's senior unsecured claims
in a bankruptcy scenario. In addition, the holding company
lacks significant mitigating factors for structural subordination.
As a result, the likely recovery rate for claims at the holding
company will be lower.
The stable ratings outlook reflects Moody's expectation that Powerlong
will (1) continue to grow its contracted sales, especially for commercial
properties; (2) ramp up its malls to generate rental revenue streams
that will improve rental income/interest coverage to about 0.4x-0.5x
over the next 12-18 months; and (3) maintain adequate liquidity
and exercise prudence in its land acquisitions.
Upward ratings pressure could emerge if Powerlong continues to grow in
scale, while maintaining its adequate liquidity and sound credit
metrics, and improves its debt leverage to a level that matches
its business model of holding investment properties.
Credit metrics that could trigger a ratings upgrade include: (1)
adjusted EBIT/interest above 3.5x; (2) rental income/interest
coverage above 0.6x; (3) adjusted debt/adjusted total capitalization
below 50%; and/or (4) cash/ short-term debt above 1.5x
on a sustained basis.
Moody's could downgrade Powerlong's ratings if the company shows a deterioration
in sales or undertakes more aggressive expansion that weakens its credit
metrics.
Credit metrics that could trigger a ratings downgrade include: (1)
adjusted EBIT/interest below 2.5x; (2) rental income/interest
below 0.4x; (3) adjusted debt/adjusted total capitalization
above 55%; and/or (4) cash/short-term debt below 100%.
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.
Powerlong Real Estate Holdings Limited is a Chinese property developer
focused on building large-scale integrated residential and commercial
properties in China. The company listed on the Hong Kong Exchange
in October 2009. The founding Hoi family held 61% of the
total number of issued shares of the company at 8 July 2019.
At 31 December 2018, Powerlong's land bank for development totaled
around 21.2 million square meters in gross floor area under development
and for future development.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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
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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
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Please see www.moodys.com for any updates on changes to
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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.
Cedric Lai
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
