Hong Kong, December 09, 2022 -- Moody's Investors Service has downgraded Central China Real Estate Limited's (CCRE) corporate family rating (CFR) to Caa2 from B3, and the company's senior unsecured rating to Caa3 from Caa1.
The outlook remains negative.
"The downgrade reflects CCRE's heightened default risks given its sizable debt maturities over the next 6-12 months and weak liquidity, due to its sluggish contracted sales and constrained access to funding," says Daniel Zhou, a Moody's Analyst.
"The negative outlook reflects our expectation that creditors' recovery prospects could deteriorate if the company defaults," adds Zhou.
RATINGS RATIONALE
CCRE faces high refinancing risks for its sizable amount of offshore debt maturities over the next 6-12 months, including USD900 million of bonds due between April and November 2023.
Moody's assesses CCRE's liquidity will be insufficient to meet all of the company's payment obligations over the next 6-12 months, absent any meaningful new fundraising or asset disposals.
CCRE's weak contracted sales will also weigh on its operating cash flow and liquidity. Moody's expects CCRE's contracted sales will continue to decline over the next 12 months as conditions remain difficult in CCRE's core markets.
CCRE's gross contracted sales decreased 56% year on year to RMB21.8 billion during the first eleven months of 2022, because of difficult market conditions and the impact from COVID-induced disruptions.
CCRE's unrestricted cash balance further dropped to RMB3.6 billion as of June 2022 after plunging to RMB5.9 billion as of December 2021 from RMB22.6 billion as of December 2020, as the company repaid a large portion of maturing debt using its internal cash resources amid a tight funding environment.
Moody's also expects that CCRE would have to use a material portion its cash for project development, thereby constraining the company's financial flexibility to service its maturing offshore bonds at the holding company level.
CCRE's earlier missed payment for the coupon of its offshore bonds also reflects the company's weak liquidity and limited financial flexibility, though the company managed to remediate the situation within the 30-day grace period.
CCRE's relationship with Henan Railway Const. & Inv. Group Co Ltd (A2 stable), which became the company's second largest shareholder in July 2022, could facilitate CCRE's access to onshore funding. However, it remains challenging for CCRE to raise sizable amounts of new funds to meet its operating and debt repayment needs over the next 6-12 months.
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, CCRE's weak liquidity and financial positions reflect the company's aggressive financial strategy and weak financial and liquidity management. The company's provision of financial guarantees to related parties will also increase its contingent liabilities and the risk of potential fund leakages.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could downgrade the ratings if CCRE defaults on its debt repayment obligations or the recovery prospects for CCRE's creditors deteriorate further.
Conversely, an upgrade is unlikely given the negative outlook.
However, positive rating momentum could emerge if CCRE successfully addresses its near-term debt repayment, as well as improves its operating cash flow, liquidity and access to funding over the next 12-18 months.
The principal methodology used in these ratings was Homebuilding and Property Development published in October 2022 and available at https://ratings.moodys.com/api/rmc-documents/394515. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Founded in 1992, CCRE is a leading property developer in Henan province in China. As of 30 June 2022, the company's land bank totaled 56.21 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.
Yiwei Daniel Zhou
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
