Hong Kong, July 26, 2021 -- Moody's Investors Service has assigned a Ba3 senior unsecured rating to
the proposed notes drawdown under the medium-term note (MTN) program
issued by Gemdale Ever Prosperity Investment Limited (Gemdale Ever Prosperity),
a wholly owned subsidiary of Famous Commercial Limited (Ba3 stable).
The proposed notes will be unconditionally and irrevocably guaranteed
by Famous and is supported by a deed of equity interest purchase undertaking
and a keepwell deed between Gemdale Corporation (Gemdale, Ba2 stable),
Famous, Gemdale Ever Prosperity and the bond trustee.
RATINGS RATIONALE
"The proposed notes will lengthen Gemdale and Famous' debt maturity
profile and will not have a material impact on their credit metrics,
since the proceeds will be used mainly for refinancing," says Kelly
Chen, a Moody's Assistant Vice President.
Famous' Ba3 CFR and senior unsecured rating on its guaranteed bonds reflect
Famous' standalone credit profile and a two-notch rating
uplift due to parental support from Gemdale, based on Moody's expectation
that Gemdale will provide financial support to its subsidiary in times
of stress.
Moody's support assumption considers (1) Gemdale's full ownership of Famous;
(2) Famous' status as Gemdale's primary platform to raise funds from offshore
debt capital markets; and (3) Gemdale's track record of providing
financial support to Famous.
Famous' standalone credit profile is constrained by the small scale of
its operations, its weak financial metrics and potential volatility
in its sales performance. However, the standalone credit
profile also factors in operational benefits arising from the company's
status as a subsidiary of Gemdale, such as cost efficiencies and
a strong brand name.
Famous' liquidity is weak. Nonetheless, Moody's expects the
company to continue receiving funding support from Gemdale and have adequate
banking facilities to fund its operations, given its close linkage
with Gemdale.
The Ba3 senior unsecured rating on the bonds guaranteed by Famous are
not affected by subordination to claims at the operating companies.
This is because Moody's expects support from Gemdale to flow through the
holding company rather than directly to its main operating companies,
mitigating any differences in expected loss that could result from structural
subordination.
Moody's, however, views that the keepwell agreements provide
weaker protection to bondholders than explicit guarantees from Gemdale.
The enforcement of keepwell agreements could also be subject to extensive
legal and procedural uncertainties, particularly because of a lack
of legal precedent in China for enforcing such agreements.
Gemdale's ability to provide support is reflected in its Ba2 CFR,
which has considered its established brand name, long operating
track record in China's (A1 stable) property market, and disciplined
and stable management team. The Ba2 CFR also factors in its good
liquidity and good access to various funding channels.
However, Gemdale's Ba2 CFR is constrained by its significant exposure
to joint venture (JV) projects, which raise its contingent liabilities
and lower its corporate and financial transparency.
Moody's expects Gemdale's debt leverage ratio, as measured by revenue
to adjusted debt, to remain at around 75% over the next 12-18
months, compared with around 73% in 2020, because its
revenue growth is likely to be in line with its debt growth.
However, its interest-servicing ability, as measured
by EBIT/interest, will decrease slightly to 4.4x from 4.8x
over the same period because its reported gross profit margin is likely
to decline to 30% from 32% due to rising land costs.
These levels of credit metrics will remain solid for its Ba2 CFR.
Gemdale's liquidity is good, supported by its strong contracted
sales and solid access to funding. As of 31 December 2020,
the company's cash balance of RMB54.2 billion covered 1.3x
of its short-term debt as of the same date. Moody's
expects Gemdale's cash holdings, together with its contracted sales
proceeds after deducting basic operating cash flow items, will be
sufficient to meet its refinancing needs and committed land payments over
the next 12-18 months.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered Gemdale's track record of disciplined financial
management, diversified ownership and board of directors,
and its established governance standard, which mitigate the risks
brought by its weakened corporate transparency due to the company's high
use of JVs.
Moody's has also taken into account Famous' private company status and
low corporate transparency. However, Gemdale's 100%
ownership of the company, established governance structure and history
of providing support to its subsidiary mitigate these risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade Famous' CFR and the rating for its guaranteed bonds
if (1) Famous improves its scale and diversity, reducing its sales
and earnings volatility; and (2) Gemdale's CFR is upgraded.
On the other hand, Famous' CFR and the rating for its guaranteed
bonds could come under pressure if (1) Gemdale's rating is downgraded;
or (2) Gemdale reduces its ownership of or lowers its support for Famous.
Moody's could also downgrade the ratings if the Famous' credit profile
or liquidity deteriorates materially because of a failure to implement
its business plan or if it expands aggressively.
The principal methodology used in this rating was Homebuilding And Property
Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Incorporated in China and listed on the Shanghai Stock Exchange,
Gemdale Corporation is a leading developer in China's residential property
sector. As of 31 December 2020, the company's land bank totaled
around 60.4 million square meters (sqm) in salable gross floor
area (GFA).
Incorporated in Hong Kong SAR, China, in 1995, Famous
Commercial Limited is a wholly-owned subsidiary of Gemdale Corporation.
The company also serves as Gemdale's funding vehicle in overseas markets.
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
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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issued on a support provider, this announcement provides certain
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rating assigned, and in relation to a definitive rating that may
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issued by one of Moody's affiliates outside the EU and is endorsed
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am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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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.
Chen Chen
AVP-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
