Hong Kong, February 27, 2020 -- Moody's has assigned a B3 senior unsecured rating to the proposed USD
notes to be issued by Xinjiang Guanghui Industry Investment (Group) Co.,
Ltd. (Guanghui Group, B2 stable). The outlook is stable.
The bond rating reflects Moody's expectation that Guanghui Group will
complete the bond issuance upon satisfactory terms and conditions,
including proper registrations with the National Development and Reform
Commission and the State Administration of Foreign Exchange in China (A1
stable).
The proceeds from the proposed issuance will be used for refinancing purposes.
RATINGS RATIONALE
On 27 February 2020, Guanghui Group announced exchange offers for
the company's outstanding existing notes due in March 2020. The
total outstanding principal amount is about USD300 million and the exchange
offers will expire on 11 March 2020.
Under the offer, for each USD1,000 principal amount of the
outstanding existing notes due in March 2020, the holders will receive
USD1,015 in aggregate principal amount of the proposed notes,
cash consideration, and accrued interest in the form of cash.
Moody's does not regard this exchange offer as a distressed exchange —
which is considered a default event under Moody's definition — because
bond holders will not incur an economic loss, given that the exchange
offer is at the par value of the existing notes.
The company is also expecting to conduct a concurrent offering of new
notes.
"The proposed issuance will not impact Guanghui Group's B2 corporate family
rating or stable outlook, as most of the proceeds will be used to
refinance existing debt, helping improve the company's debt
maturity profile," says Roy Zhang, a Moody's Assistant Vice
President and Analyst and the Lead Analyst for Guanghui Group.
Guanghui Group's revenue reached RMB189 billion in 2018, growing
by an average year-on-year growth rate of 22% over
the past three years. Meanwhile, its leverage --
as measured by adjusted total debt to EBITDA -- decreased
to 6.0x at the end of 2018 from a peak of 9.9x at the end
of 2016. The improving trend is supported by the company's leadership
in the domestic auto dealer industry, as well as by its diversified
business operations across energy and real estate.
With a 33% stake, Guanghui Group is the largest shareholder
in the China Grand Automotive Services Grp Co., Ltd (CGA,
B1 stable). CGA is the leading auto dealer in China (A1 stable)
in terms of unit sales, with a large network, strong geographic
coverage, and a diversified brand offering. It contributed
to 88% of Guanghui's consolidated revenues in 2018.
Moody's expects Guanghui Group will continue to grow its business scale
and maintain its leverage ratio around 6.0x-6.5x
over the next 12-18 months.
"However, the B2 rating is constrained by Guanghui Group's private
company status, its structural subordination to the listed operating
entities, and its weak liquidity," adds Zhang.
Guanghui Group is a private company, and its corporate governance
and transparency are weaker than those of publicly listed companies.
Furthermore, its lack of access to the equity markets represents
a disadvantage when compared with listed companies.
Guanghui Group operates its auto dealer business through its 33%-owned
CGA, and its energy business through its 44%-owned
Guanghui Energy Co., Ltd. As a holding company,
Guanghui Group is also structurally subordinated to these operating entities.
Guanghui Group's liquidity profile is weak due to its high reliance on
short-term debt, which amounted to around RMB66.6
billion at the end of June 2019 and well exceeded its cash holdings --
including pledged deposits -- of RMB31.5 billion.
However, the company has a good track record of refinancing its
debt, and also demonstrated good funding access in 2019 when overall
funding conditions were not favorable for privately-owned enterprises
in China.
The stable outlook reflects Moody's expectation that (1) Guanghui Group
will maintain its stake in, and control over, CGA; (2)
CGA will maintain its credit profile; and (3) Guanghui Group will
be able to refinance its short-term debt.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
In terms of environmental and social risks, some of Guanghui Group's
businesses, such as its oil and gas, coal mining and chemical
businesses, are exposed to high risks associated with tightening
emission standards and ensuring safe operations. However,
such risks are partially mitigated by the company's track record of operational
continuity and business diversification.
In terms of corporate governance, in addition to its private company
status, the company's share ownership is concentrated in Ms.
Sun Guangxin, who held a 50.06% stake in the company
as of the end of 2018. Such risk is partially mitigated by the
presence of China Evergrande Group (B1 stable) as the second largest shareholder,
with a 40.97% stake as of the same date.
The B3 senior unsecured bond rating is one notch lower than it would otherwise
be due to structural subordination risk. This risk reflects the
fact that the majority of Guanghui Group's claims are at its operating
subsidiaries and have priority over its senior unsecured claims at the
holding company in a bankruptcy scenario.
Moody's could upgrade the rating if Guanghui Group: (1) improves
its liquidity, such that its cash/short-term debt trends
towards 1x; (2) improves its control over its major subsidiaries,
such that its shareholding increases materially and its share pledge reduces
materially; and (3) improves its credit metrics, such that
adjusted debt/EBITDA falls to 5.0x-5.5x and EBITDA/interest
exceeds 2.5x on a sustained basis.
On the other hand, Moody's could downgrade the rating if (1)
Guanghui Group reduces its ownership in, or control over,
CGA; (2) CGA's credit profile weakens materially; or (3) Guanghui
Group's liquidity or credit metrics further deteriorate, such that
its adjusted debt/EBITDA exceeds 8.0x and EBITDA/interest falls
below 1.0x-1.5x on a sustained basis.
The principal methodology used in this rating was Retail Industry published
in May 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Xinjiang Guanghui Industry Investment (Group) Co., Ltd.
is a private company that operates in three key segments, namely
auto dealerships, energy and real estate. At the end of June
2019, the company held a 33% stake in China's largest auto
dealer by revenue, China Grand Automotive Services Co.,
Ltd.
Founded in 1989, the unlisted Xinjiang Guanghui was 50.06%
owned by the Mr. SUN Guangxin at the end of 2018. Mr.
Sun is the chairman, founder and controlling shareholder.
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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and whose ratings may change as a result of this credit rating action,
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to rated entity, Disclosure from rated entity.
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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.
Roy Zhang
Asst Vice President - 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
Clement Cheuk Yiu Wong
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
