Hong Kong, June 12, 2018 -- Moody's Investors Service has assigned a first-time Baa3 Issuer
Rating to Wuhan Real Estate Development & Investment Group Co.,
Ltd.
Moody's has also assigned a Baa3 rating to the proposed USD senior unsecured
notes to be issued by the company.
The ratings outlook is stable.
RATINGS RATIONALE
Wuhan Real Estate's Baa3 Issuer Rating considers its baseline credit assessment
(BCA) of ba3 as well as the potential for support in times of stress,
which results in a rating that is three-notches above its BCA.
This approach -- which considers first the company's standalone
profile - recognizes that the entity is not guaranteed by its local
government owner, which is not obliged to directly support the company's
debt. However, given its importance we expect there is a
high likelihood that the company will receive support to stabilize its
credit profile in times of need. This support could take the form
of government subsidies, capital or asset injections, bank
lending from state owned institutions or other means.
Moody's support assessment reflects Wuhan Real Estate's leading
role in the shantytown renovation program of the Wuhan city which owns
100% of the company, as well as the reputational and contagion
risks that may arise if it were to default, given its status as
one of the top 10 local SOEs in Wuhan city and Hubei province in terms
of assets. As such, we believe the relevant authorities would
support efforts of the city and province to seek ways to prevent a Wuhan
Real Estate default and thus avoid the risk of disruption to the domestic
financial market that might occur otherwise.
Wuhan Real Estate is mainly responsible for the shantytown renovation
development and urban infrastructure construction in the Wuhan city.
In addition to the public policy related activities, the company
is engaged in property development in the city on a commercial basis,
mainly in residential property development.
This situation has prompted Moody's to categorize the company in the "Commercial
Public Sector".
Moody's believes that Wuhan Real Estate is likely to be supported in times
of need, based on the following considerations:
1) Wuhan Real Estate is the financing and coordinating platform for the
shantytown renovation program (Phase I) in the Wuhan city. It is
also the largest entity working on the shantytown renovation program in
the city in terms of the number of projects and investment amount.
Shantytown renovation is a key national initiative for supporting urbanization
and economic development;
2) The track record of Wuhan Real Estate receiving support: 1) around
RMB16 billion (representing 53% of the company's total debt) were
classified as the government's direct liabilities at the end of 2014 and
have been fully refinanced through government debt swaps during the past
three years, and 2) the company has received ongoing subsidies,
refunds of cost and profit from land sales, and cash injections
from the Wuhan Government;
3) Wuhan Real Estate's close integration and solid track record of coordination
with the Wuhan Government and other government bureaus in terms of strategic
planning, resource allocation and project execution.
These factors are counterbalanced by the fact that parts of Wuhan Real
Estate's operations are commercial activities in their nature,
which results in a lower likelihood of support than for activities that
implement public policy mandates; and uncertainty arising from ongoing
central government policy changes regarding support from regional and
local governments to their SOEs.
The BCA of ba3 reflects Wuhan Real Estate's large asset base; predictability
of future cash flow supported by the government procurement model for
shantytown renovation projects; and synergy between its public policy
related activities and commercial property development.
From 2017, Wuhan Real Estate signed government procurement agreements
with the Wuhan Government for its shantytown renovation projects.
The government procurement model, underpinned by contractual payments
which have been included in the fiscal budget, will enhance the
predictability of Wuhan Real Estate's future cash flow.
Residential property development conducted on a commercial basis is the
major revenue and profit contributor for Wuhan Real Estate. Through
collaboration with the government on shantytown renovation and infrastructure
projects, the company can obtain good quality land bank at competitive
costs during the process, which supports its high gross margin for
the property development business, which has been around 30%
during the past few years.
The operating cash flow generated from the property development business
can also provide a liquidity buffer for the shantytown renovation and
infrastructure projects, if needed.
On the other hand, Wuhan Real Estate's BCA is constrained by:
1) its exposure to the volatile land and property markets; 2) its
sizeable capital expenditures (capex) related to shantytown renovation
projects; and 3) uncertainty arising from policy changes regarding
the funding arrangement for infrastructure projects.
Wuhan Real Estate has moderate exposure to the property market due to
its residential property development business on a commercial basis.
Its infrastructure projects are also partly funded by the refund of cost
and profit from land sales.
Currently, Wuhan Real Estate is only focused on the local market.
Moody's takes some comfort that underlying demand will support property
and land prices in the Wuhan market due to continuous population inflow
and the low inventory level in the city.
The company's planned capex will remain high in the next 1-3
years because of its investment in the shantytown renovation projects,
which will weigh on debt leverage. Nevertheless, cash flow
will be strengthened under the government procurement model. Accordingly,
Moody's estimates adjusted debt/capitalization ratio and funds from
operations (FFO)/interest coverage will be maintained at 60%-65%
and around 2.0x in the next 12-18 months, compared
to 64% and 1.7x observed in 2017, after including
the government's cash injection through capital reserves and capitalized
interest for property development in FFO, and carving out the swapped
government bonds.
The stable outlook incorporates Moody's expectation that over the
next 12-18 months (1) Wuhan Real Estate's credit metrics
will be maintained at levels that are appropriate for its ba3 BCA;
and (2) its importance to the Wuhan Government will remain intact.
Moody's will upgrade the rating if the company's BCA improves,
without any material changes in the support assessment.
Moody's will raise the company's BCA if it can improve its financial
profile by strengthening cash flow and reducing debt. Credit metrics
that will indicate upward pressure on the BCA include: (1) adjusted
funds from operations (FFO) interest coverage — including the government's
cash injection through capital reserves and capitalized interest for property
development — exceeding 3.0x on a sustained basis; and
(2) adjusted debt/capitalization — excluding swapped government
bonds — below 50% on a sustained basis.
Moody's would downgrade the rating if the company's BCA is lowered
because of a material deterioration in its business or financial profile,
without any material changes in the support assessment.
Credit metrics indicative of downward pressure on its BCA include:
(1) adjusted FFO interest coverage below 1.2x-1.5x;
and (2) adjusted debt/capitalization above 70%-75%
on a sustained basis.
A downgrade of Wuhan Real Estate's rating — without a lowering of
its BCA — could also be triggered by a change in Moody's support
assessment, for example, if the company expands aggressively
in the area of commercial activities leading to a reduction in its importance
to the Wuhan Government.
The methodologies used in these ratings were Homebuilding And Property
Development Industry published in January 2018, and Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Wuhan Real Estate Development & Investment Group Co.,
Ltd. is 100% owned by the State-owned Assets Supervision
and Administration Commission of Wuhan Government. The company
has formed three core business segments, namely indemnificatory
housing (including shantytown renovation projects, public rental
housing, low-rent housing, subsidized housing,
relocation housing and long-term rental apartment), urban
infrastructure construction and property development. Its assets
totaled RMB120.4 billion at end-2017.
The Local Market analyst for these ratings is Cindy Yang, +86
(10) 6319-6570.
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.
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.
Chenyi Lu
VP - Senior Credit Officer
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
Gary Lau
MD - Corporate Finance
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