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Rating Action:

Moody's assigns B3 to Modern Land's proposed USD notes

09 Apr 2019

Hong Kong, April 09, 2019 -- Moody's Investors Service has assigned a B3 senior unsecured debt rating to Modern Land (China) Co., Limited's (B2 stable) proposed USD notes.

The rating outlook for Modern Land is stable.

The company plans to use the proposed new notes consideration to exchange part of its existing senior unsecured notes.

RATINGS RATIONALE

"The proposed bond issuance and exchange offer will modestly improve Modern Land's debt maturity profile and will not materially affect the company's credit metrics," says Celine Yang, a Moody's Assistant Vice President and Analyst.

Moody's estimates that Modern Land's leverage — as measured by revenue/adjusted debt and including adjustments for its shares in joint ventures and associates — will trend towards 60% over the next 12-18 months from 52% in 2018. Such improvement will be driven by controlled debt growth and an increase in revenue, supported in turn by contracted sales of RMB32.1 billion in 2018, up 45% from RMB22.2 billion in 2017.

Modern Land's adjusted EBIT/interest coverage, including adjustments for its shares in joint ventures and associates, will likely remain weak at 1.4x -1.6x over the next 12-18 months from 1.5x in 2018, because its increasing funding costs will offset a likely improvement in EBIT.

Moody's expects that Modern Land's liquidity will stay adequate. In particular, its cash balance of RMB9.7 billion at the end of 2018, together with cash received from its sales of properties during the year, will be sufficient to cover its short-term debt of RMB8.8 billion and fund part of its capital expenditure requirements.

Modern Land's B2 corporate family rating (CFR) reflects the company's (1) track record of marketing and selling its concept of comfortable and eco-friendly homes; (2) ability to execute consistent growth in contracted sales; and (3) adequate liquidity.

At the same time, Modern Land's CFR is constrained by (1) its weak credit metrics, driven by debt-funded growth and high interest cost; and (2) the significant exposure of its land bank to lower-tier cities, where there is higher demand volatility compared to Tier 1 and Tier 2 cities.

The stable rating outlook reflects Moody's expectation that Modern Land will (1) maintain adequate liquidity and grow its sales as planned; (2) adjust its pace of expansion in accordance with market conditions to avoid a material deterioration in its credit profile; and (3) maintain good access to funding.

Modern Land's B3 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 claims are at the operating subsidiaries. These claims have priority over Modern Land'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.

Upward rating pressure could emerge if Modern Land establishes a track record of (1) growing its scale and establishing its brand in new locations outside its home market; (2) maintaining a reasonable cash balance, such that cash/short-term debt stays above 1.5x on a sustained basis; and (3) strong financial discipline in its land acquisitions, with homebuilding EBIT/interest coverage above 2.5x-3.0x and revenue/adjusted debt above 70%-75% on a sustained basis.

Downward rating pressure could emerge if (1) Modern Land's liquidity and ability to generate operating cash flow prove to be weaker than Moody's expectations because of declining contracted sales and aggressive land acquisitions; (2) the company's revenue recognition is slower than Moody's expects or its profit margins decline, leading to a further drop of its interest coverage and financial flexibility; or (3) the company's funding access weakens significantly.

Metrics indicative of downward rating pressure include (1) Modern Land's balance sheet cash, both restricted and unrestricted, falling below 100% of short-term debt; or (2) the company's adjusted EBIT/interest coverage weakening below 1.5x 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.

Modern Land (China) Co., Limited was founded in 2000 in Beijing by Mr Zhang Lei, now its chairman, who is a real estate developer in China. The company specializes in developing green housing units, and is one of the few early leaders in China's green and eco-friendly lifestyle market.

The company listed on the Hong Kong Stock Exchange in July 2013. At 31 December 2018, Modern Land had a total land bank of around 8.7 million square meters in gross floor area.

The company's lands are mainly located in cities such as Beijing, Hefei, Taiyuan, Wuhan, Changsha, Xiantao, Quanzhou, Suzhou, Zhangjiakou, Jingzhou, Dongguan, Dongdaihe and Foshan.

Modern Land will focus on its expansion into tier 2 and lower-tier cities over the next 1-2 years.

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 when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, 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.

YuYing (Celine) Yang
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

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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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