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
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Cedric Lai
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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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.
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JOURNALISTS: 852 3758 1350
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