NOTE: On July 27, 2020, the press release was corrected as follows: The second paragraph of the RATINGS RATIONALE was changed to “The missed payment represents an economic loss for lenders as the original payment promise cannot be met given its constrained liquidity profile. Moody's views this missed payment event as a default under Moody's definition.” Revised release follows.
Hong Kong, July 24, 2020 -- Moody's Investors Service has downgraded China ZhengTong Auto Services
Holdings Ltd.'s corporate family rating (CFR) and senior unsecured
debt ratings to Caa3 from B3.
The outlook on the ratings remains negative.
On 22 July, ZhengTong announced that it has proposed to the lenders
of its term loan facility to revise the due date for payment of the third
instalment of the loan's principal amount from 20 July 2020 to 19
January 2021. The company is still in discussion with the lenders.
"The downgrade hence reflects ZhengTong's tight liquidity position and
consequent inability to meet its payment obligation," says Roy Zhang,
a Moody's Vice President and Senior Analyst.
RATINGS RATIONALE
ZhengTong's rating primarily reflects its weak liquidity amid a challenging
operating environment. This offsets its credit strength of having
sizable operations in China's fast-growing luxury car dealership
market, its large network and wide geographic coverage.
The missed payment represents an economic loss for lenders as the original payment promise cannot be met given its constrained liquidity profile. Moody's views this missed payment event as a default under Moody's definition.
Moody's estimates ZhengTong's debt repayment risk remains elevated as
it will need to address a large amount of upcoming maturities.
At the end of 2019, the company had reported unrestricted cash of
RMB1.5 billion and restricted cash of RMB2.1billion,
with RMB17.5 billion of reported debt due in the next 12 months.
From a governance perspective, the company's ownership is concentrated
in its key shareholder, who held a 56.4% stake at
31 December 2019. In addition, only a minority of its board
comprises of independent directors. These concerns are partly mitigated
by the company's listed status.
In terms of financial policy, the company has a track record of
tapping both debt and non-debt channels. However,
the need to revise the original payment due date demonstrates weakness
in its financial planning.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects Moody's concerns over the company's tight
liquidity and ability to arrange funding on time to meet its obligations.
An upgrade is unlikely in the near term, given the negative outlook.
A positive rating action could be considered if the company makes significant
progress on servicing its debt obligations and improves its liquidity.
Moody's could downgrade the ratings if principal losses for its debt holders
are likely to increase.
The principal methodology used in these ratings was Retail Industry published
in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Incorporated in 1999, China ZhengTong Auto Services Holdings Ltd.
is one of the leading players in the luxury car dealership market in China.
Headquartered in Beijing, its operation encompassed 135 dealership
stores in 41 cities across 17 provinces at the end of 2019. The
company mainly focuses on luxury and ultra-luxury brands.
ZhengTong's shares listed on the Hong Kong Stock Exchange in December
2010. Mr. Wang and his family owned 56.4%
of the company at the end of December 2019.
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.
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Roy Zhang
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
Clement Cheuk Yiu Wong
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
