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Rating Action:

Moody's downgrades Evergrande's and its subsidiaries' ratings; reviews ratings for downgrade

 The document has been translated in other languages

30 Jun 2021

Hong Kong, June 30, 2021 -- Moody's Investors Service has downgraded the corporate family ratings (CFR) of China Evergrande Group (Evergrande), Hengda Real Estate Group Company Limited (Hengda), Tianji Holding Limited (Tianji) and the backed senior unsecured ratings of Scenery Journey Limited.

The affected ratings are as follows:

• Evergrande's CFR has been downgraded to B2 from B1, and its senior unsecured ratings have been downgraded to B3 from B2;

• Hengda's CFR has been downgraded to B2 from B1;

• Tianji's CFR has been downgraded to B3 from B2;

• Scenery Journey's backed senior unsecured ratings have been downgraded to B3 from B2;

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 placed the ratings under review for further downgrade. The previous ratings outlook was negative.

Hengda is a 60%-owned onshore subsidiary of Evergrande. It also owns 100% of Tianji, which in turn owns 100% of Scenery Journey.

"The downgrade reflects Evergrande's weakened funding access and reduced liquidity buffer given its large debt maturities in the coming 12-18 months amid the tight credit environment in China and volatility in the capital markets," says Cedric Lai, a Moody's Vice President and Senior Analyst.

Although Evergrande has been reducing its debt to improve its financial stability, the company still faces sizeable maturing debt and puttable bonds over the next 12-18 months. In addition, its trade payables increased to RMB622 billion at the end of 2020 from RMB545 billion at the end of 2019, which funded part of the debt reduction.

Moody's expects the company will continue to focus on generating internal cash to pay its maturing debts and fund its operations over the next 12-18 months. However, the review for downgrade reflects the uncertainty over the company's ability to materially reduce its debt and payables to more sustainable levels, given its heightened financial risk.

RATINGS RATIONALE

Evergrande's B2 CFR reflects the company's strong market position as one of the top three property developers in China (A1 stable) in terms of contracted sales and land bank size. The CFR also reflects the company's nationwide geographic coverage, strong sales execution and low-cost land bank.

Nevertheless, the rating is constrained by Evergrande's sizable maturing debt over the next 12-18 months, high proportion of trust loans and moderate credit metrics. The company's significant investments in its non-property businesses also constrain its credit profile.

Evergrande'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. However, Moody's expects the company to continue to generate operating cash flow in the next 12 months, backed by contracted sales growth and high cash collection rate, which will cover the shortfall, the company's dividends and committed land payments over the same period.

Moody's expects the company's contracted sales will grow modestly to around RMB750 billion in 2021 and RMB760 billion in 2022, supported by its strong sales execution. The company's contracted sales grew 5% to RMB285.2 billion in the first five months of 2021 compared with a year ago, with company's estimated cash collection ratio of 88%.

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 that Evergrande's debt leverage — as measured by revenue/adjusted debt (excluding payables) — will improve to 75%-80% over the next 12-18 months from 68% in 2020. Similarly, Moody's expects Hengda's revenue/adjusted debt (excluding payables) will increase to 90%-95% over the next 12-18 months from 85% in 2020.

Adjusted EBIT/interest for both Evergrande and Hengda will improve because of the leverage trend. Specifically, Moody's expects that Evergrande's EBIT/interest will improve to 1.5x-2.0x over the next 12-18 months from 1.4x in 2020, while Hengda's EBIT/interest will rise to 2.0x-2.5x from 1.7x over the same period.

Hengda's B2 CFR reflects the company's strong market position as one of the top property developers in China in terms of contracted sales and the size of its land bank. The rating also reflects Hengda's nationwide geographic coverage, strong sales execution, low-cost land bank and focus on mass-market residential properties. However, the CFR is constrained by the company's moderate debt leverage, sizable maturing debt over the next 12-18 months and high proportion of trust loans.

Evergrande's B3 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 B3 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 B3 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) risks, Moody's has considered Evergrande'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. Nevertheless, Evergrande's established internal governance structures and standards, as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange, mitigate this risk. Evergrande's board has a total of nine members, three of which are independent nonexecutive directors.

The company is transparent in disclosing its business and financial activities. However, its financial policy favors the use of debt leverage that maximizes returns to shareholders.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's review will focus on (1) Evergrande's access to funding and its refinancing and its liquidity risks, specifically its ability to address its maturing debt (including puttable bonds) in a timely manner, (2) the company's ability to reduce its leverage and payables on a sustained basis, and (3) its ability to reduce its reliance on trust loans in its debt composition.

Moody's could downgrade the rating if Evergrande fails to materially reduce its debt and payables to more sustainable levels or maintain its adequate liquidity.

An upgrade of the ratings is unlikely given the review for downgrade. However, Moody's could return the rating outlook to stable if Evergrande improves its access to funding, and materially reduces its debt and payables and reliance on trust loans such that its capital structure becomes more sustainable in nature.

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.

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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.

Cedric Lai
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

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

No Related Data.
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