Hong Kong, April 04, 2022 -- Moody's Investors Service has downgraded Central China Real Estate Limited's (CCRE) corporate family rating (CFR) to B3 from B1, and its senior unsecured rating to Caa1 from B2.
The outlook remains negative.
"The downgrade reflects CCRE's weakened liquidity and heightened refinancing risks in view of its depleted cash position and weakened access to capital market funds," says Kaven Tsang, a Moody's Senior Vice President.
The company's heavy exposure to the offshore bond market, which represented around 70% of its total reported debt as of December 2021, also made its liquidity vulnerable to the volatility of the market.
"The negative outlook reflects the uncertainties over the company ability to raise new funding to support its business plan, restore its liquidity and address its refinancing needs," adds Tsang.
RATINGS RATIONALE
Moody's has changed its assessment of CCRE's liquidity to weak from adequate, in view of the company's depleted cash position, declining contracted sales and constrained access to funding.
The agency also assesses that the company has to raise new funding, including asset disposal, to support its operation and refinancing needs in the next 12-18 months.
CCRE will have USD bonds of $500 million due in August 2022 and $300 million due in April 2023. Given the company's weakened access to the offshore bond market, which is a major source of its funding, it is unlikely that the company can issue new offshore bonds to refinance the maturing bonds.
The use of internal resources to repay the debt will exacerbate the company's liquidity pressure. Moody's expects the company to scale down its land acquisitions and developments, as well as control its expenses to preserve liquidity for debt servicing. Moody's also expects CCRE to maintain its access to onshore bank loans. However, such measures may not be sufficient to address the company's liquidity pressure.
CCRE's unrestricted cash dropped to RMB5.9 billion as of the end of 2021 from RMB22.6 billion as of December 2020, as the company repaid around RMB10 billion of bonds amid the difficult capital market conditions. Accordingly, the company's unrestricted cash/short-term debt declined to 87% from 148% over the same period. The company's total debt also reduced to RM21.9 billion as of December 2021 from RMB31.3 billion as of December 2020.
CCRE's gross contracted sales fell 12% to RMB60 billion in 2021 due to the weak operating conditions and the impact of flooding and the coronavirus outbreak in Henan province.
Moody's expects CCRE's gross contracted sales will decline further to RMB45 billion-RMB50 billion in 2022 because of the weak market sentiment, uncertain demand in low-tier cities, and the company's plan to scale down its operation.
Declining contracted sales will reduce the company's cash flow and liquidity. It will also weaken revenue recognition in the next 1-2 years. The company's profit margin could also contract to 13%-14% over the same period as the company may have to lower selling prices to push sales.
However, CCRE's debt reduction will lower its interest expenses. Accordingly, its EBIT/interest coverage would stay at 2.2x-2.3x in the next 1-2 years, largely unchanged from 2.3x in 2021.
CCRE's B3 CFR continues to reflect its leading market position and long operating track record in Henan province. However, the company's geographic concentration in Henan limits its operational flexibility and exposes it to regional economic and regulatory risks. The B3 CFR is also constrained by the company's weakened liquidity and access to the offshore bond market, a major source of the company's funding.
CCRE's senior unsecured bond rating is one notch lower than its CFR because of the risk of structural subordination. This subordination risk reflects the fact that most of CCRE's 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.
In terms of environmental, social and governance (ESG) factors, Moody's has taken considered CCRE's concentrated ownership by its controlling shareholder, Mr. Wu Po Sum, who had a 69.64% stake in the company as of 30 June 2021. The company's provision of financial guarantees to related parties will also increase its contingent liabilities and the risk of potential fund leakages.
Moody's has also considered the presence of special committees — the audit and remuneration committees — that are chaired by independent nonexecutive directors to oversee corporate governance; and the application of the Listing Rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance in Hong Kong SAR, China in governing related-party transactions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of CCRE's ratings is unlikely over the next 12 months, given the negative outlook.
However, Moody's could change the outlook to stable if CCRE improves its liquidity and access to funding; balances its funding channels, with a lower reliance on offshore funding; and maintains stable sales, profitability and credit metrics through the next 12-18 months.
On the other hand, Moody's could downgrade CCRE's ratings if the company is unable to restore its liquidity in the next 1-2 months, or its access to funding and its liquidity deteriorate further.
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.
Founded in 1992, Central China Real Estate Limited (CCRE) is a leading property developer in Henan province in China. As of 31 December 2021, the company's land bank totaled 53.45 million square meters in gross floor area (GFA).
REGULATORY DISCLOSURES
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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.
Kaven Tsang
Senior Vice President
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
