Hong Kong, August 02, 2021 -- Moody's Investors Service has downgraded the corporate family rating
(CFR) and senior unsecured ratings of China Evergrande Group ("Evergrande"),
the CFRs of Hengda Real Estate Group Company Limited and Tianji Holding
Limited, and the backed senior unsecured ratings of Scenery Journey
Limited.
The affected ratings are as follows:
-- Evergrande's CFR has been downgraded to Caa1 from B2,
and its senior unsecured ratings have been downgraded to Caa2 from B3;
-- Hengda's CFR has been downgraded to Caa1 from B2;
-- Tianji's CFR has been downgraded to Caa2 from B3;
and
-- Scenery Journey's backed senior unsecured ratings have
been downgraded to Caa2 from B3.
The backed senior unsecured rating on the notes issued by Scenery Journey
are guaranteed by Tianji. The notes are also supported by a keepwell
deed and a deed of equity interest purchase undertaking between Hengda,
Tianji, Scenery Journey and the bond trustee.
At the same time, Moody's has changed the rating outlook to
negative from ratings under review.
These actions conclude Moody's review for downgrade initiated on 30 June
2021.
"The downgrades reflect Evergrande's heightened refinancing risk over
the coming 12-18 months given its weakened funding access and liquidity
position. We also expect its profit margins to decline as the company
lowers the selling prices of its properties to preserve liquidity,"
says Cedric Lai, a Moody's Vice President and Senior Analyst.
The company's funding access has weakened, as demonstrated by its
highly volatile onshore and offshore bond prices, following reduced
investors' and creditors' confidence amid continued negative news regarding
the company.
The negative outlook reflects Moody's expectation that the company's
liquidity profile will remain weak over the next 12-18 months.
RATINGS RATIONALE
Evergrande's Caa1 CFR reflects the company's nationwide geographic coverage,
strong sales execution and low-cost land bank. However,
the rating takes into consideration the company's sizable maturing debt
over the next 12-18 months, high proportion of trust loans
and moderate credit metrics. In addition, the company's significant
investments in non-property businesses also constrain its credit
profile.
Evergrande's liquidity position is weak. The company's cash on
hand of RMB181 billion as of the end of 2020 was not sufficient to cover
its short-term debt of RMB335 billion as of the same date.
Given its weakened access to funding, the company will need to focus
on generating internal cash to repay its maturing debts and fund its operations
in 2021. The company's primary objective of generating cash
from property sales will continue to squeeze its profit margins.
As such, Moody's expects Evergrande's gross margin to
further decline to 16%-18% over the next 12-18
months from 24% in 2020.
In the first half of 2021, the company's contracted sales grew 3%
from a year ago to RMB356.8 billion, but its average selling
price dropped to RMB8,295 per square meter (sqm), compared
with RMB8,945 per sqm in 2020 and RMB10,281 per sqm in 2019.
Meanwhile, Moody's expects that Evergrande will reduce spending
on land and control debt growth over the next 12-18 months,
given its high debt leverage. Accordingly, Moody's expects
the company's debt leverage to improve over the next 12-18
months.
On the other hand, its interest coverage will weaken because of
the expected decline fall in gross margins. Specifically,
Moody's expects Evergrande's EBIT/interest to decrease slightly to 1.3x
over the next 12-18 months from 1.4x in 2020, while
Hengda's EBIT/interest will reduce slightly to 1.6x from 1.7x
over the same period.
Hengda's credit profile is closely linked to that of Evergrande.
In 2020, Hengda accounted for 88% of Evergrande's revenue
and 81% of its reported debt. Specifically, Hengda's
Caa1 CFR reflects the company's nationwide geographic coverage,
strong sales execution, low-cost land bank and focus on mass-market
residential properties. However, the rating takes into consideration
the company's sizable maturing debt over the next 12-18 months,
high proportion of trust loans and moderate credit metrics.
Evergrande's Caa2 senior unsecured rating is one notch below its CFR,
reflecting structural subordination. This risk reflects the fact
that most of the 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.
Tianji's Caa2 CFR reflects the company's standalone credit profile and
a one-notch rating uplift, based on Moody's expectation that
Hengda will provide financial support to Tianji when needed.
The one-notch uplift reflects (1) Hengda's full ownership of Tianji;
(2) Tianji's status as the primary platform for Hengda to invest in offshore
property projects and raise offshore funds; and (3) Hengda's track
record of providing financial support to Tianji.
Tianji's standalone credit profile factors in its moderately large scale,
weak liquidity and weak credit metrics.
The Caa2 senior unsecured rating on the notes guaranteed by Tianji considers
Moody's expectation that support from Hengda mitigates the risk of structural
subordination.
In terms of environmental, social and governance (ESG) considerations,
Moody's has considered the company's weak financial management,
given that its financial policy favors the use of debt leverage that maximizes
returns to shareholders.
The rating also considered the company's concentrated ownership by its
key shareholders, Hui Ka Yan and his wife, who held a 77%
stake in the company as of the end of 2020.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely given the negative outlook.
However, the outlook could return to stable if Evergrande improves
its access to funding, and reduces its debt and payables such that
its capital structure becomes more sustainable in nature.
On the other hand, Moody's could downgrade the ratings if
Evergrande's access to funding and 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.
China Evergrande Group (Evergrande) is one of the top three developers
in China by sales volume, with a standardized operating model.
The company, which was founded in 1996 in Guangzhou, has rapidly
expanded its business across China over the past few years. As
of December 2020, its land bank totaled 231 million square meters
in gross floor area.
Hengda Real Estate Group Company Limited (Hengda) is the property arm
and flagship subsidiary of Evergrande. It is also one of the top
three property developers in China by sales volume, with a standardized
operating model. The company was also founded in 1996 in Guangzhou,
and has rapidly expanded its business across the country over the past
few years.
Evergrande is Hengda's largest shareholder. As of December 2020,
Evergrande owned 60% of Hengda's shares.
Incorporated in Hong Kong in 2009, Tianji Holding Limited is an
offshore holding company that houses some of Hengda's property projects
in China and overseas, including Hengda's Hong Kong headquarters.
Hengda owns 100% of Tianji, which owns 100% of Scenery
Journey Limited.
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Cedric Lai
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Franco Leung
Associate Managing Director
Corporate Finance Group
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