Hong Kong, September 22, 2022 -- Moody's Investors Service has downgraded Guangzhou Fineland Real Estate Development Co., Ltd.'s corporate family rating (CFR) to Caa1 from B3 and the company's senior unsecured rating to Caa2 from Caa1.
The outlook remains negative.
"The downgrade reflects Fineland's heightened refinancing risks due to its weak liquidity and sizable debt maturities over the next 6-12 months," says Alfred Hui, a Moody's Analyst.
"The negative outlook reflects the high uncertainties over the company's ability to raise new fund to address its refinancing needs," adds Hui.
RATINGS RATIONALE
Fineland's liquidity has deteriorated materially, with its cash balance declining to RMB2.6 billion as of end of June 2022 from RM4.9 billion as of year-end 2021 due to weak contracted sales and repayment of maturing debt. Still, Fineland has sizable debt maturities over the next 12 months, including RMB918 million onshore bond puttable in December 2022 and USD340 million offshore bond maturing in July 2023. Moody's estimates that Fineland's cash holdings, together with its operating cash flow, will not be sufficient to cover all of the maturing debt.
Moody's expects Fineland's contracted sales will remain weak and will decline by around 15% year on year in 2022 to around RMB10.5 billion, after plunging 27% year on year in 2021. The weak contracted sales will constrain its operating cash flow and liquidity. Furthermore, there are also high uncertainties over the company's ability to raise alternative funding to repay the debt, given the weak market condition and its constrained access to external funding.
Fineland's credit metrics are also deteriorating because of its weak sales performance. Moody's expects Fineland's interest-servicing ability, as measured by EBIT interest coverage, will deteriorate to 1.3x-1.4x over the next 12-18 months from 1.8x for the 12 months ended June 2022, due to reduced revenue booking and lower gross margin. Moody's expects Fineland's gross margin will contract to 23%-24% over the next 12-18 months from 24.9% in H1 2022 and 28.6% in 2021, as the company could have to offer more price discounts to boost contracted sales and cash collection.
Fineland's Caa1 CFR also considers its private company status and the associated governance risks of weaker information disclosure and corporate governance standard than its listed peers.
Fineland's Caa2 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 is unlikely, given the negative outlook.
However, positive rating momentum could emerge 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 and refinancing risks heighten 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
