Hong Kong, May 27, 2020 -- Moody's Investors Service has assigned a B3 senior unsecured rating
to the proposed notes to be issued by Fantasia Holdings Group Co.,
Limited (B2 stable).
Fantasia plans to use the proceeds from the proposed notes to refinance
certain of its offshore existing indebtedness.
The outlook on the rating is stable.
RATINGS RATIONALE
"The proposed bond issuance will not have a material impact on Fantasia's
credit profile, given that the proceeds will mainly be used to refinance
the company's maturing debt," says Celine Yang, a Moody's
Assistant Vice President and Analyst.
Moody's expects Fantasia's leverage -- as measured by revenue
to adjusted debt -- will improve to 55%-60%
in the next 12-18 months from 49% in 2019, driven
by an increase in revenue on the back of strong contracted sales growth
in the past one to two years. At the same time, Moody's estimates
the company's interest coverage -- as measured by EBIT/interest
-- will improve towards 1.5x-2.0x from
1.5x over the same period.
Fantasia's contracted sales grew 13.8% to RMB7.7
billion in the first four months of 2020 from RMB6.8 billion in
the same period last year. Moody's expect Fantasia's sales
will grow to around RMB40 billion-RMB45 billion annually in the
coming 12-18 months from RMB36.2 billion in 2019,
supported by its good sales execution amd relatively stable housing demand
in its core markets.
Fantasia's B2 corporate family rating (CFR) reflects the company's (1)
long track record in property development in the Chengdu-Chongqing
Economic Zone and the Pearl River Delta; (2) diversified income streams
from its property management businesses; and (3) adequate liquidity.
On the other hand, the B2 rating is constrained by (1) the company's
high leverage and weak interest coverage, resulting from debt-funded
growth and high-cost financing; and (2) the long development
cycles for its urban redevelopment projects.
Fantasia's liquidity position is good, supported by its sufficient
cash holdings. Moody's expects the company's cash holdings,
together with its operating cash flow, will be sufficient to cover
its maturing debt (including onshore puttable bonds) and committed land
payments over the next 12-18 months.
As of December 2019, the company's cash holdings of about RMB20.7
billion, after deducting cash held by Colour Life, covered
about 1.8x of its short-term debt of RMB11.5 billion.
In terms of governance considerations, Moody's has taken into
consideration the company's concentrated ownership in Zeng Jie Baby,
who has a 57.5% stake. This factor is mitigated by
the company's established internal governance, which ensures the
disclosure of material related-party transactions as required by
companies listed on the Hong Kong Stock Exchange. Also, the
company's audit committee, remuneration committee and nomination
committee are dominated by independent non-executive directors.
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 environmental, social and governance
(ESG) framework, given the substantial implications for public health
and safety.
The stable outlook reflects Moody's expectation that Fantasia's
credit metrics will recover gradually in the next 12-18 months
from the current weak levels, supported by its contracted sales
growth and adequate liquidity.
Fantasia's B3 senior unsecured debt rating is one notch lower than
the company's B2 CFR due to structural subordination risk.
The subordination risk refers to the fact that the majority of Fantasia'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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade Fantasia's ratings if the company improves
its debt maturity profile, liquidity profile and credit metrics,
such that its (1) revenue/adjusted debt rises to 60%-70%;
(2) EBIT/interest improves to 2.5x or above, (3) cash/short-term
debt rises above 1.25x, all on a sustained basis.
On the other hand, Moody's could downgrade Fantasia's
ratings if (1) the company's contracted sales or cash collections
weaken; (2) it engages in aggressive land acquisitions or other business
acquisitions, such that its debt leverage and liquidity deteriorate
materially; (3) its refinancing and liquidity risks increase;
or (4) its credit metrics deteriorate, with EBIT/interest failing
below 1.5x over the next 12-18 months.
The principal methodology used in this rating was Homebuilding And Property
Development Industry published in January 2018 and available at https://www.moodys.com/research/Homebuilding-And-Property-Development-Industry--PBC_1108031.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Fantasia Holdings Group Co., Limited is a property developer
in China (A1 stable). Established in 1996, the company listed
on the Hong Kong Stock Exchange in November 2009. In addition to
property development, Fantasia is engaged in providing property
operation services, property agency services and hotel services
for its own properties and properties of third parties.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
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YuYing (Celine) Yang
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Franco Leung
Associate Managing Director
Corporate Finance Group
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Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
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