Hong Kong, January 07, 2020 -- Moody's Investors Service has assigned a B2 rating to Zhenro Properties
Group Limited's (B1 stable) proposed senior unsecured USD notes.
Zhenro plans to use the proceeds from the proposed notes to refinance
existing debt.
RATINGS RATIONALE
"The proposed bond issuance will lengthen Zhenro's debt maturity profile
and will not have a material impact on its credit metrics, because
it will mainly use the proceeds to refinance existing debt," says
Cedric Lai, a Moody's Vice President and Senior Analyst.
Moody's expects that Zhenro's debt leverage — as measured by revenue/adjusted
debt — will trend towards 60% over the next 12-18
months from around 40% for the 12 months ended 30 June 2019.
Its interest coverage — as measured by adjusted EBIT/interest —
should also improve to around 2.1x from 1.8x over the same
period.
Zhenro's B1 corporate family rating (CFR) reflects the company's (1) quality
and geographically diversified land bank, which helps the company
to manage property market volatility and regulatory risks; (2) ability
to generate strong contracted sales growth; and (3) good liquidity
and improved access to funding, especially in the debt capital markets.
On the other hand, the CFR is constrained by Zhenro's improving
but still-moderate financial metrics as a result of its rapid debt-funded
growth. The rating also considers Zhenro's considerable participation
in joint-venture (JV) businesses. However, most of
the company's JV partners are reputable.
Zhenro's liquidity is good. Moody's expects that the company's
cash holdings and cash flow from operating activities will be sufficient
to cover its maturing debt and committed land payments over the next 12
months. The company's cash and cash equivalents/short-term
debt registered 121% at the end of 30 June 2019.
The B2 senior unsecured debt rating is one notch lower than the CFR due
to structural subordination risk. This risk reflects the fact that
the majority of Zhenro's claims are at its 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. Consequently, the expected
recovery rate for claims at the holding company will be lower.
With respect to governance risk, Moody's has considered the company's
concentrated ownership by the owner family, which held a 64.56%
stake in the company at 30 July 2019.
Moody's has also considered (1) the fact that independent directors chair
the audit and remuneration committees; (2) the low level of related-party
transactions and dividend payouts; (3) the presence of other internal
governance structures and standards as required by the Hong Kong Exchange;
and (4) the company's financial policy to pursue expansion which
resulted in its elevated leverage.
The stable rating outlook reflects Moody's expectation that Zhenro will
be able to execute its sales plan and remain prudent in its financial
management, such as by maintaining sufficient liquidity.
Moody's could upgrade Zhenro's ratings if the company (1) demonstrates
sustained growth in its contracted sales and revenue through the economic
cycles without sacrificing its profitability; (2) remains prudent
in its land acquisitions and financial management; (3) improves its
credit metrics, such that EBIT/interest registers at least 3.0x
and revenue/adjusted debt rises to 75%-80% or above
on a sustained basis; and (4) maintains adequate liquidity.
On the other hand, the company's ratings could come under downward
pressure if Zhenro: (1) generates weak contracted sales; (2)
suffers from a material decline in its profit margins; (3) experiences
an impairment of its liquidity position, such that cash/short-term
debt falls below 1.0x; and/or (4) materially increases its
debt leverage.
Credit metrics indicative of a downgrade include EBIT/interest coverage
falling below 2.0x and/or adjusted revenue/debt falling below 50%-55%
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.
Zhenro Properties Group Limited was incorporated in the Cayman Islands
in 2014 and listed on the Hong Kong Stock Exchange in January 2018.
At 30 June 2019, Zhenro had 167 projects in 29 cities across China.
Its key operating cities include Shanghai, Nanjing, Fuzhou,
Suzhou, Tianjin and Nanchang.
The company was founded by Mr. Ou Zongrong, who indirectly
owned 54.6% of Zhenro Properties at 30 July 2019.
His sons, Mr. Ou Guowei and Mr. Ou Guoqiang,
together owned 9.96% of the company as of the same date.
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
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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
