Hong Kong, August 31, 2020 -- Moody's Investors Service has assigned a Baa3 senior unsecured rating
to the proposed senior perpetual securities to be issued by Nan Fung Treasury
(III) Limited, a wholly owned subsidiary of Nan Fung International
Holdings Limited (NFIH, Baa3 stable). The perpetual securities
will be unconditionally and irrevocably guaranteed by NFIH.
The outlook remains stable.
The proceeds from the securities will be used by NFIH for the refinancing
of existing perpetual securities of the Group.
RATINGS RATIONALE
"The Baa3 rating reflects NFIH's long track record in Hong Kong's
property market, product diversity, stable recurring income
stream that is partly supported by a growing rental portfolio, strong
balance sheet liquidity, and low debt leverage," says
Stephanie Lau, a Moody's Vice President and Senior Analyst.
The rating also takes into consideration the company's excellent liquidity
and financial flexibility, underpinned by its sizable cash position
and liquid financial investments.
These strengths are balanced by the lumpiness of the company's property
sales, because of the relatively small scale of its operations and
land bank when compared with other Hong Kong rated peers with property
development exposure.
Moody's expects that NFIH's debt leverage, as measured by adjusted
debt/total capitalization, will register around 28% over
the next 12-18 months, similar to the 28.3%
as of 31 March 2020. The forecast reflects Moody's expectation
of a stable debt position, without any material capital spending
or debt-funded acquisitions. Such a result would be in line
with the Baa3 rating category.
The proposed issuance will not materially change NFIH's credit metrics,
because Moody's expects that the proceeds will be used mainly to
refinance its existing perpetual securities.
The Baa3 rating on the proposed perpetual securities reflects the fact
that the securities will rank pari passu with all other present and future
unsubordinated and unsecured obligations of NFIH.
While the perpetual securities have hybrid-like features,
with the option of deferred coupons on a cumulative basis, Moody's
considers them as 100% debt-like securities and has not
notched down the rating, because the securities have a dividend
suspension clause that creates an incentive for the company to service
the coupon.
However, the rating on the securities could be lowered — relative
to NFIH's issuer rating — if debt with deferral features becomes
a substantial portion of its capital structure, or if Moody's believes
that the company will likely defer many payments in advance of default.
Moody's has factored in NFIH's private company status and the dominance
of executive directors in its board. Moody's has also taken
into account NFIH's concentrated ownership by Chen's Group
International Limited (BVI), which is a wholly owned entity of the
founding family, Dr. Chen's estate. These factors
are mitigated by the company's long track record of prudent financial
management through cycles, and low dividend payout. In addition,
some degree of checks and balances are provided by the representation
of solely independent directors in NFIH's conflicts, audit
and remuneration committees.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook reflects Moody's expectation that NFIH will maintain
a conservative business strategy, stable operations anchored by
its recurring income stream, stable leverage and adequate liquidity.
Upward rating pressure could emerge, if NFIH (1) increases its business
scale, (2) generates higher recurring revenue from its investment
property portfolio, and (3) shows sufficient coverage of its net
debt position through its financial investment portfolio on a sustained
basis. Credit metrics that Moody's would take into consideration
for an upgrade include adjusted debt/total capitalization below 20%-25%,
and recurring income coverage above 2.0x-2.5x,
both on a sustained basis.
Downward rating pressure could emerge, if NFIH (1) undergoes aggressive
expansion that results in an increase in its debt leverage; and/or
(2) records a material decline in its cash position or financial investment
portfolio, or both. Credit metrics Moody's would take
into consideration for a downgrade include debt leverage, as measured
by adjusted debt/total capitalization, above 30%-35%,
and recurring income coverage of interest below 1.25x.
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.
Nan Fung International Holdings Limited is an established property developer
based in Hong Kong, with property projects in Hong Kong and China.
In addition to its own developments, it also has joint ventures
with major developers in Hong Kong. The company has a sizable financial
investment portfolio, providing the group with a good liquidity
buffer.
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.
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Stephanie Lau
Vice President - Senior 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
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Chris Park
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
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
