Approximately USD1.3 billion of debt affected
Hong Kong, January 04, 2011 -- Moody's Investors Service has downgraded to Ba3 from Ba2 its corporate
family rating on Country Garden Holdings Company Limited.
At the same time, Country Garden's senior unsecured debt rating
is affirmed at Ba3.
The outlook for both ratings is stable.
"The rating downgrade reflects Country Garden's ambitious
future sales target and growth plan, which entail higher debt funding,
resulting in adjusted debt to total capitalization higher than 50%
for the foreseeable future," says Peter Choy, a Moody's
Senior Vice President.
"Moody's also expects Country Garden's EBITDA/interest
coverage to be in the 3.0x-3.4x range in the next
12 to 18 months, when we expect the residential market will be somewhat
weakened as regulatory measures are more effectively enforced,"
adds Choy.
Such a financial profile positions the company more appropriately at the
low Ba level, compared with its Chinese property peers.
"Although Country Garden's contracted sales, amounting
to around RMB 30 billion in the first 11 months of 2010, were better
than expected, the company plans to continue to expand, which
in the absence of new equity will result in a higher level of borrowings"
says Choy.
"The higher debt gearing and the low adjusted EBITDA margin (at
around 25%- 27%) will also exert pressure on Country
Garden's fixed charge coverage ratio and limit its financial flexibility
to raise additional onshore debt under the bond indentures,"
explains Choy.
That said, Moody's draws certain comfort from the company's
track record in raising off-shore long-term funding to lengthen
its debt maturity profile.
Country Garden's Ba3 rating reflects the company's strong
sales in the suburban markets of economically strong Guangdong Province;
low land costs; products at affordable prices; niche markets
in second- and third-tier cities that are less vulnerable
to severe regulatory measures; and its diversified portfolio,
which comprises more than 70 projects.
The rating is constrained, however, by Country Garden's need
for debt funding to support its rapid growth model and the execution risk
on projects outside Guangdong Province.
Country Garden's liquidity remains healthy, as the company
had unrestricted cash of about RMB 6.4 billion as of 30 June 2010.
It also has another US$250 million in restricted cash, which
can support the equity swap of its convertible bonds, of which close
to 70% have been retired.
Moody's has not notched the rating on Country Garden's senior
unsecured debt, as the company has increased its offshore borrowings,
totaling US$1.6 billion, and kept its onshore borrowings
at the subsidiary level at around 13% of total assets (as estimated
by Moody's) at end-December 2010.
To stabilize its capital structure -- especially since Chinese bank
credit growth will likely slow down in 2011 -- Country Garden will
continue to access the offshore bond market.
In Moody's view, the company's total secured debt and
subsidiary debts will remain below 15% of total assets for the
next two to three years.
The stable outlook reflects Country Garden's strong sales execution
and ability to maintain reasonable liquidity to manage its development
business.
Downward rating pressure could emerge if Country Garden (1) experiences
difficulty implementing its business plan; (2) sees its profit margins
erode further; or (3) suffers from a further weakening in the Chinese
property market, such that its operating cash flow weakens more
than expected.
Thus, a downgrade could be considered if its EBITDA margin falls
below 20%; adjusted debt/total capitalization remains above
50%-55% and is unlikely to decline; EBITDA/interest
declines below 3.0x for a prolonged period; or the company
reports continuous negative operating cash flow (before land payments),
which further weakens its liquidity.
Upward rating pressure could emerge if Country Garden maintains (1) strong
sales execution; (2) a prudent approach to acquiring land; (3)
its debt leverage below 50%; (4) profit margin at 25%--30%;
and (5) EBITDA/interest above 3.5x--4.0x.
The last rating action on Country Garden was taken on 4 August,
2010, when Moody's assigned a Ba3 rating with a negative outlook
to the company's new USD400 million five-year senior unsecured
bonds.
The principal methodology used in rating Country Garden was Moody's "Global
Rating Methodology on Homebuilding Industry," published in March
2009 and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Founded in 1997 in China and listed in Hong Kong in April 2007,
Country Garden Holdings Company Limited is one of the leading integrated
property developers in China.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Hong Kong
Peter Choy
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Moody's downgrades Country Garden; outlook stable
