Hong Kong, February 19, 2020 -- 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 company plans to use the notes' proceeds to refinance its existing
indebtedness.
RATINGS RATIONALE
"The proposed bond issuance, if completed, will have limited
impact on Modern Land's credit profile, given that the proceeds
will mainly be used to refinance the company's existing debt," says
Celine Yang, a Moody's Assistant Vice President and Analyst.
Moody's expects Modern Land's debt leverage -- as measured
by revenue/adjusted debt -- to weaken to around 55%
over the next 12-18 months from 69% for the 12 months ended
June 2019, because its debt growth will likely outpace revenue growth
to fund land acquisitions. Meanwhile, the company's EBIT/interest
will likely weaken slightly to around 2.0x over the next 12-18
months from 2.2x for the 12 months ended June 2019.
Modern Land's total contracted sales fell slightly to RMB2.0
billion in January 2020 from RMB2.1 billion in January 2019,
reflecting the impact of the Chinese New Year festival and the outbreak
of the coronavirus. Although the company's sales are likely
to stay weak in 1Q 2020 because of the outbreak, Moody's expects
sales will recover through the remainder of 2020, keeping total
contracted sales growth at a level similar to that achieved in 2019.
Moody's will continue to monitor developments and evaluate the credit
impact if the disruption is prolonged.
Modern Land's B2 corporate family rating (CFR) reflects the company's
(1) niche in marketing and selling eco-friendly homes; (2)
track record of consistently growing its contracted sales; and (3)
adequate liquidity.
At the same time, Modern Land's CFR is constrained by its low gross
profit margin when compared to its peers, as well as its weak interest
coverage, a result of its debt-funded growth and high financing
costs.
In terms of governance considerations, Moody's has taken into consideration
the concentrated ownership by Modern Land's founder and chairperson,
Zhang Lei, who held an approximate 66.3% stake in
the company as of June 2019.
Such concentrated ownership is counterbalanced by the company's established
governance structures and standards as required by the relevant code for
companies listed on the Hong Kong Stock Exchange. Furthermore,
the company has three special committees in place, an audit committee,
remuneration committee and nomination committee, two of which are
chaired and dominated by the company's independent nonexecutive directors.
Modern Land's liquidity is adequate. Moody's expects the
company's cash holdings and operating cash flow to be sufficient to cover
its dividend payments, maturing debt and committed land payments
over the next 12-18 months. As of June 2019, the company's
cash balance of RMB10.4 billion (including restricted cash) covered
139% of its short-term debt of RMB7.4 billion as
of the same date.
Modern Land's B3 senior unsecured debt rating is one notch lower than
the company's B2 CFR due to structural subordination risk.
This risk reflects the fact that the majority of claims are at the operating
subsidiaries and 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.
The stable outlook reflects Moody's expectation that Modern Land
will maintain adequate liquidity and grow its sales as planned over the
next 12-18 months.
Moody's could upgrade Modern Land's ratings if the company
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.
Moody's could downgrade Modern Land's ratings if (1) the company's
liquidity and ability to generate operating cash fall below Moody's
expectations because of declining contracted sales and aggressive land
acquisitions; (2) the company's prices decline and its revenue recognition
is slower than expected, or its profit margins decline further,
leading to further weakness in its interest coverage and financial flexibility;
or (3) the company engages in material debt-funded acquisitions.
Metrics indicative of a potential downgrade include Modern Land's balance-sheet
cash, both restricted and unrestricted, falling below 100%
of short-term debt or the company's homebuilding 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.
Modern Land was listed on the Hong Kong Stock Exchange in July 2013.
As of 30 June 2019, the company had a total land bank of around
9.95 million square meters in gross floor area.
The company's land bank is situated in different cities such as
Beijing, Taiyuan, Xiantao, Hefei, Guizhou,
Fuyang, Huzhou, Suzhou, Guangzhou and Jiangxi,
and it plans to expand further into quality tier 2 cities over the next
one to two years.
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
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.
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Regulatory disclosures contained in this press release apply to the credit
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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.
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
