Hong Kong, November 11, 2022 -- Moody's Investors Service has downgraded Country Garden Holdings Company Limited's corporate family rating (CFR) and senior unsecured rating to Ba3 from Ba2.
The rating outlook remains negative.
"The downgrade reflects our expectation that Country Garden's liquidity buffer will further reduce due to its still constrained funding access and sizable refinancing needs over the next 12-18 months. Its financial metrics will also decline to levels not supportive of its previous rating level over the next 1-2 years because of declining sales and profitability," says Kaven Tsang, a Moody's Senior Vice President.
"The negative outlook reflects our view that the company's financial and liquidity positions could further worsen over the next 12-18 months due to challenging operating and funding conditions," adds Tsang.
RATINGS RATIONALE
Moody's expects Country Garden's liquidity to remain adequate but its liquidity buffer will reduce given it is likely to use its internal resources to repay maturing debt over the next 12-18 months due to its weakened access to onshore and offshore capital markets. Its access to offshore bank markets could also become more uncertain, given banks' increased risk aversion amid a prolonged market downturn.
Specifically, Country Garden will have around RMB43 billion of onshore and offshore bonds and a material amount of offshore bank loans due through March 2024.
While Country Garden's monthly contracted sales have stabilized at around RMB30 billion over the past 2-3 months, the 37% year-on-year decline for the first 10 months still indicate a weak contracted sales performance.
Moody's expects that Country Garden's high exposure to low-tier cities will continue to dampen its contracted sales and profit margin over the next 12-18 months, given the weak economic fundamentals and housing demand in low-tier cities.
Falling contracted sales and tight funding conditions could also weigh on the company's future revenue recognition and financial metrics.
Moody's projects the company's EBIT/interest coverage will decrease to 2.5x-2.8x over the next 1-2 years from 3.7x during the 12 months ended June 2022. Meanwhile, its debt/EBITDA will rise to 6.5x-7.0x from 5.0x over the same period. Its projected financial profile is more in line with the Ba3 rating when compared with its rated Chinese property peers.
Country Garden's liquidity buffer continues to narrow as the company repays maturing debt using internal resources. This trend will lessen the company's ability to withstand the downcycle in China's property sector if there are no signs of a recovery over the next 6-12 months.
Country Garden's Ba3 CFR reflects the company's strong brand name, sizable land bank and track record of developing mass-market residential properties in China. On the other hand, the rating is constrained by the company's large exposure to low-tier cities, modest credit metrics and weakened access to funding.
Moody's notes that Country Garden recently issued RMB1.5 billion of medium-term notes with support from the Chinese government. While the completion of the issuance will provide the company with additional liquidity, the issuance size is not material as compared with the amount of its maturing debt over the next 12-18 months.
Country Garden's Ba3 senior unsecured bond rating is not affected by the subordination to claims at the operating company level. This is because despite its status as a holding company with most claims at the operating subsidiaries, creditors of Country Garden benefit from the group's diversified business profile, with cash flow generation across a large number of operating subsidiaries with high geographic diversification. Such diversification mitigates structural subordination risk.
In terms of environmental, social and governance (ESG) factors, Moody's has considered Country Garden's concentrated ownership by its key shareholder, Yang Huiyan, who held a 61.23% stake in the company as of the end of June 2022. The agency has also considered the presence of five independent nonexecutive directors on the company's 13-member board, and the presence of other internal governance structures and standards as required by the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the ratings is unlikely in the near term, given the negative outlook.
However, Moody's could revise Country Garden's rating outlook to stable if the company strengthens its access to long-term funding, increases sales, enhances its credit metrics and maintains good liquidity through the downcycle.
Credit metrics supportive of its rating include EBIT/interest above 2.75x and debt/EBITDA below 6.5x, all on a sustained basis.
However, Moody's could downgrade the ratings if the company's liquidity, funding access, contracted sales and financial metrics weaken further over the next 6-12 months.
Credit metrics that could lead to a downgrade include EBIT/interest falling below 2.25x or debt/EBITDA rising above 7.0x.
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.
Country Garden Holdings Company Limited, founded in 1992 and listed on the Hong Kong Stock Exchange, is a leading Chinese integrated property developer. As of the end of 2021, the company had an attributable land bank with a gross floor area of 233.3 million square meters spanning 1,425 cities in China.
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
