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Rating Action:

Moody's changes outlook on Evergrande and its subsidiaries to negative from stable

 The document has been translated in other languages

23 Jun 2020

Hong Kong, June 23, 2020 -- Moody's Investors Service has changed the outlooks on the ratings of China Evergrande Group (Evergrande), Hengda Real Estate Group Company Limited (Hengda), Tianji Holding Limited (Tianji) and Scenery Journey Limited (Scenery Journey) to negative from stable.

At the same time, Moody's has affirmed the following ratings:

• Evergrande's B1 corporate family rating (CFR) and B2 senior unsecured debt rating;

• Hengda's B1 CFR;

• Tianji's B2 CFR; and

• The B2 backed senior unsecured rating on the notes issued by Scenery Journey and guaranteed by Tianji. The notes are also supported by a keepwell deed and a deed of equity interest purchase undertaking between Hengda, Tianji, Scenery Journey, and the bond trustee.

Hengda is a 63.5%-owned onshore subsidiary of Evergrande. It also owns 100% of Tianji, which in turn owns 100% of Scenery Journey.

RATINGS RATIONALE

"The negative outlook reflects our concerns over Evergrande's ability to materially reduce its high level of short-term debt, high debt leverage and still high proportion of trust loans in its total debt over the next 12-18 months," says Cedric Lai, a Moody's Vice President and Senior Analyst. "In addition, the negative outlook also reflects our concern over its ability to improve its weakened profit margins amid deteriorating economic conditions and our negative outlook for the China property sector."

Evergrande's liquidity is weak. The company had sizable short-term debt of RMB372 billion at the end of 2019, mainly comprising trust and bank loans. Its cash holdings of RMB229 billion at the end of 2019 and its cash/short-term debt stood at 0.6x at the end of 2019. Moody's expects its current cash holdings, together with its cash flow from operations, will not be sufficient to cover its debt maturities and other obligations through the next 12-18 months, meaning the company will need to raise new debt to manage its refinancing needs.

The negative outlook also considers the costs and risks associated with its non-property businesses, including new energy vehicle (NEV) investments. Such businesses have consumed sizable capital and are unlikely to turn sufficiently profitable to replenish its capital over the next 12-18 months, given their nascent stage. This has contributed in part to a degree of divergence in the financial profiles of Evergrande and Hengda, given Hengda's exclusive focus on property development in China.

Meanwhile, the company recorded solid 18% year-on-year contracted sales growth to RMB272.8 billion in the first five months of 2020, outperforming nationwide property sales growth over the same period. Moody's expects the company's contracted sales will grow modestly in 2020 from the RMB601 billion recorded in 2019, supported by its strong sales execution. Nevertheless, such development will unlikely result in a meaningful reduction in short-term debt. Refinancing risk however is mitigated by Evergrande's track record of accessing diversified funding channels, including the bank and capital markets for debt refinancing.

Moody's expects that Evergrande will reduce spending on land and control debt growth over the next 12-18 months given its high debt leverage. Accordingly, Moody's expects that Evergrande's debt leverage — as measured by revenue/adjusted debt — will improve to 53%-59% over the next 12-18 months from 47% in 2019. Similarly, Moody's expects Hengda's revenue/adjusted debt will increase to 67%-77% over the next 12-18 months from 59% in 2019.

Moody's has included the RMB130 billion in investments from Hengda's strategic investors in the calculation of the companies' adjusted debt, but notes that the funds were treated as equity by the companies, in accordance with China GAAP and Hong Kong GAAP.

Adjusted EBIT/interest for both Evergrande and Hengda will also improve because of the leverage trend. Specifically, Moody's expects that Evergrande's EBIT/interest will improve to 2.1x-2.3x over the next 12-18 months from 1.7x in 2019, and Hengda's EBIT/interest to 2.5x-2.8x from 2.1x over the same period.

Hengda's B1 CFR reflects the company's strong market position as one of the top property developers in China (A1 stable) in terms of contracted sales and the size of its land bank. The rating also reflects Hengda's nationwide geographic coverage, strong sales execution, low-cost land bank and focus on mass-market residential properties. However, the company's CFR is constrained by its weak liquidity and high debt leverage.

Evergrande's B1 CFR mainly reflects the credit profile of Hengda, with the latter accounting for most of Evergrande operations and financial profile. At the end of 2019, Hengda accounted for 89% of Evergrande's revenue, 78% of cash, 70% of reported debt, 84% of total assets, and around 80% of the company's land bank. Evergrande's B1 CFR further considers its high risk appetite in expanding its non-property businesses, a factor that constrains its liquidity.

Evergrande's B2 senior unsecured rating is one notch below its CFR, reflecting legal and structural subordination. This risk reflects the fact that most of the claims are at the operating subsidiaries and have priority over claims at the holding company in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the expected recovery rate for claims at the holding company will be lower.

Tianji's B2 CFR reflects the company's standalone credit profile and a one-notch rating uplift, based on Moody's expectation that Hengda will provide financial support to Tianji in a situation of financial stress.

The one-notch uplift reflects (1) Hengda's full ownership of Tianji; (2) Tianji's status as the primary platform for Hengda to invest in offshore property projects and raise offshore funds; and (3) Hengda's track record of providing financial support to Tianji.

Tianji's standalone credit profile factors in its moderately large scale, weak liquidity, and weak credit metrics.

The B2 senior unsecured rating of the notes guaranteed by Tianji takes into account Moody's expectation that support from Hengda mitigates the risk of structural subordination.

In terms of environmental, social and governance (ESG) factors, Moody's has considered the concentrated ownership by Evergrande's key shareholders, Mr. Hui Ka-yin and his wife, who held a total 77% stake in the company at end of 2019. Evergrande benefits from established internal governance structures and standards, as required for companies listed on the Hong Kong Stock Exchange. The board has three independent non-executive directors out of a total nine-member board of directors.

Moody's regards the impact of the deteriorating global economic outlook amid the rapid and widening spread of the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could downgrade Evergrande's CFR if (1) it embarks on aggressive acquisitions and a high-growth strategy; (2) fails to deleverage; (3) its liquidity weakens; or (4) there is a material reduction in the ownership of its subsidies, including Hengda.

Metrics indicative of a downgrade include (1) cash/short term debt below 1.0x; (2) revenue/adjusted debt below 50%; and (3) EBIT/ interest below 2.0x.

An upgrade of Evergrande's CFR is unlikely in the near term given the negative rating outlook. However, the outlook could return to stable if (1) the company demonstrates discipline in its business growth and acquisitions; (2) its liquidity position improves so that it can meet its refinancing needs; and (3) its credit metrics improve.

Moody's could downgrade Hengda's CFR if (1) it embarks on aggressive acquisitions and a high-growth strategy; (2) fails to deleverage; or (3) its liquidity weakens.

An upgrade of Hengda's CFR is unlikely in the near term given the negative rating outlook. However, the outlook could return to stable if (1) the company demonstrates discipline in its debt growth as it grows its business; (2) its liquidity position improves so that it can meet its refinancing needs; and (3) its credit metrics improve.

Moody's could downgrade Tianji's CFR if (1) its liquidity position further weakens; (2) Hengda's rating is downgraded; or (3) Tianji's significance within the Hengda group declines, leading to reduced financial or operational support.

An upgrade of Tianji's CFR is unlikely in the near term given the negative rating outlook. However, the outlook could return to stable if (1) the outlook on Hengda's rating returns to stable; and (2) Tianji maintains a stable standalone profile.

The principal methodology used in these ratings 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.

China Evergrande Group is among the top five developers in China by sales volume, with a standardized operating model. Founded in 1996 in Guangzhou, the company has rapidly expanded its business across China over the past few years. At 31 December 2019, its land bank totaled 293 million square meters in gross floor area.

Hengda Real Estate Group Company Limited is the property arm and flagship subsidiary of China Evergrande Group. It is among the top property developers in China by sales volume, with a standardized operating model. Founded in 1996 in Guangzhou, Hengda has rapidly expanded its business across the country over the past few years.

China Evergrande Group is Hengda's largest shareholder. At 31 December 2019, the former owned 63.5% of Hengda's shares.

Incorporated in Hong Kong in 2009, Tianji Holding Limited is an offshore holding company that houses some of Hengda's property projects in China and overseas, including Hengda's Hong Kong headquarters.

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

These ratings are 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 entities are participating and the rated entities or their agent(s) generally provide 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

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.

Cedric Lai
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
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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