Hong Kong, June 20, 2022 -- Moody's Investors Service has downgraded Guangzhou Fineland Real Estate Development Co., Ltd.'s corporate family rating (CFR) to B3 from B2 and its senior unsecured rating to Caa1 from B3.
The outlook remains negative.
"The downgrade reflects Fineland's weakening liquidity, driven by its declining operating cash flow over the next 12-18 months," says Alfred Hui, a Moody's Analyst.
That said, the company's urban redevelopment projects in Guangzhou and investment properties could provide it certain operating and financing flexibilities.
"The negative outlook reflects the uncertainties over the company's ability to address its refinancing needs amid a tight funding environment," adds Hui.
RATINGS RATIONALE
Moody's has changed its assessment of Fineland's liquidity to weak from adequate, reflecting its likely inability to raise new financing, its declining sales over the next 12-18 months. Nevertheless, Moody's expects Fineland to continue to have access to bank financing to support its project operations, considering its quality urban redevelopment projects in Guangzhou. Its investment properties could also provide it some funding flexibility through secured loans.
Moody's expects Fineland's contracted sales to decline by 10%-15% to RMB11 billion in 2022 from the previous year, after a 27% decline in 2021 because of weak consumer sentiment and tight funding conditions. The sales decline will reduce the company's operating cash flow and, in turn, its liquidity.
Fineland's contracted sales reached only RMB2.7 billion in the first five months of 2022, but Moody's expects this will pick up later in the year as more urban redevelopment projects are launched in Guangzhou amid a gradual relaxation of policy controls.
Fineland has RMB918 million of onshore bonds becoming puttable in December 2022 and USD340 million of offshore bond due in July 2023. Moody's expects the company will need to repay these bonds mostly using internal cash sources, given the tighten funding conditions. This will strain its funding flexibility to support its business operations.
At the end of 2021, Fineland's unrestricted cash balance was RMB4.7 billion. Although this amount could fully cover its short-term debt of RMB1.1 billion as of the same date, Moody's expects part of it would have to be kept at the project level to support its operations. This would limit the company's flexibility to use internal cash to service debt at the holding company level.
Furthermore, Fineland's credit metrics will remain weak over the next 12-18 months. Moody's forecasts the company's debt leverage, as measured by revenue/adjusted debt, will decline to around 30% over the next 12-18 months from 35% in 2021, driven by revenue decline from weak contracted sales. Its interest-servicing ability, as measured by EBIT interest coverage, will also weaken to 1.3x-1.4x from 1.6x over the same period.
Moody's also considers Fineland's private company status, as its information disclosure and corporate governance are less transparent than those of its listed peers.
The Caa1 senior unsecured debt rating is one notch lower than the company's CFR due to structural subordination risk. This risk reflects the fact that the majority of claims are at the operating subsidiaries and have priority over Fineland's senior unsecured claims 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Fineland's ratings is unlikely over the next 12 months, given the negative outlook.
However, Moody's could change the outlook to stable if Fineland improves its liquidity and access to funding and strengthens its sales, profitability and credit metrics over the next 12-18 months.
On the other hand, Moody's could downgrade Fineland's ratings if its liquidity deteriorates further.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66220. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Founded in 1995, Guangzhou Fineland Real Estate Development Co., Ltd. is a property developer based in Guangdong Province that targets mid to high-end customers. The company adopts Eastern-style designs in its developments for different customers. As of the end of 2021, Fineland was wholly owned by its founder and chairman, Fang Ming.
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.
Alfred Hui
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
