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Rating Action:

Moody's assigns Ba3 to Gemdale's proposed MTN drawdown

26 Jul 2021

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 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

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

No Related Data.
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