Hong Kong, October 06, 2022 -- Moody's Investors Service has downgraded CIFI Holdings (Group) Co. Ltd.'s corporate family rating (CFR) to B3 from B1 and senior unsecured rating to Caa1 from B2.
The outlook remains negative.
"The rating downgrade reflects CIFI's elevated refinancing risks over the next 6-12 months, driven by its weakened access to funding and weaker-than-expected contracted sales," says Cedric Lai, a Moody's Vice President and Senior Analyst.
"The negative outlook reflects the uncertainty over the company's ability to generate new funds, through new borrowings or asset disposals, to manage its refinancing needs and restore its liquidity over the coming 6-12 months," adds Lai.
RATINGS RATIONALE
Moody's has changed its assessment of CIFI's liquidity to weak from adequate in view of the deterioration in the company's operations and access to funding amid weak market conditions.
In particular, Moody's forecasts the company's contracted sales will decline significantly to around RMB135 billion in 2022 and RMB120 billion in 2023, from around RMB247 billion in 2021, driven by the weak market conditions and lower homebuyers' confidence in the company's products. CIFI's contracted sales significantly decreased by 47% during the first eight months in 2022 to RMB94.3 billion compared with the same period in 2021.
Moody's notes that CIFI has made a clarification announcement on 29 September 2022 following recent negative news around the company's investment trust products. However, Moody's expects CIFI's access to various funding channels will remain weak, given creditors' cautious appetite towards the company. Consequently, Moody's believes CIFI will unlikely be able to raise sizable new funds at a reasonable cost to refinance all of its maturing debt, including puttable onshore and offshore bonds of around RMB8.0 billion by the end of 2023. CIFI will likely need to rely on internal cash sources to cover its maturing debt. This will weaken the company's cash on hand and further stress its liquidity profile. CIFI's unrestricted cash balance reduced to RMB31.1 billion as of the end of June 2022 from RMB46.5 billion as of the end of 2021, due to lower sales and repayment of some maturing debt using internal cash.
Moody's also expects the company to offer price discounts to accelerate sales and cash flow, which will lead to a squeeze in its profit margins.
Consequently, Moody's expects CIFI's credit metrics to deteriorate. Its EBIT/interest coverage will fall to 2.3x-2.6x from 3.6x for the 12 months ended June 2022, and its debt leverage, as measured by revenue/adjusted debt, will reduce to around 55%-60% over the next 12-18 months from 78% for the 12 months ended June 2022.
In terms of environmental, social and governance (ESG) factors, Moody's has considered CIFI's concentrated ownership as its controlling shareholders, Lin Zhong and his family members, collectively held a 53.2% stake in the company as of 31 August 2022. Moody's considers that CIFI's financial strategy and risk management have deteriorated, demonstrated by the significant decline in cash during the first half of 2022, as well as its payment of final dividend at a time when preserving liquidity is critical, indicating the company's prioritization of the interest of shareholders over creditors. This weakening governance practice also drives today's rating action.
CIFI's B3 CFR reflects the company's strategic focus on catering to mass-market housing demand, as well as its diversified geographic coverage.
On the other hand, CIFI's credit profile is constrained by the company's weakened operating performance, deteriorating credit metrics and liquidity profile, and material exposure to its joint venture (JV) businesses, which hinders the transparency of its credit metrics.
The Caa1 senior unsecured debt rating is one notch lower than the CFR due to structural subordination risk. The majority of CIFI's claims are at its operating subsidiaries and have priority over claims at the holding company in a liquidation scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. Consequently, the expected recovery rate for claims at the holding company will be lower.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the ratings is unlikely over the next 12 months, given the negative outlook.
However, positive rating momentum could emerge if CIFI improves its liquidity and access to funding; repays its maturing debt without sacrificing its balance sheet liquidity; and maintains stable credit metrics through the next 12-18 months.
On the other hand, Moody's could downgrade CIFI's ratings if the company's access to funding and liquidity deteriorate further, and in turn, further increases its refinancing risks.
Downward pressure could also increase if CIFI's contingent liabilities associated with its JVs or the likelihood of CIFI providing funding support to the JVs increases significantly.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66220. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
CIFI Holdings (Group) Co. Ltd. (CIFI) was founded in 2000 and incorporated in the Cayman Islands in May 2011. It listed on the Hong Kong Stock Exchange in November 2012. As of 31 August 2022, it was 53.2% owned by the Lin family.
REGULATORY DISCLOSURES
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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
