Hong Kong, September 03, 2021 -- Moody's Investors Service has downgraded to B2 from B1 the Corporate Family
Rating (CFR) of Guangzhou R&F Properties Co., Ltd.
(Guangzhou R&F), and to B3 from B2 the CFR of R&F Properties
(HK) Company Limited (R&F HK).
At the same time, Moody's has placed the ratings under review for
further downgrade.
The rating outlooks were negative before the review for further downgrade.
"The downgrade of Guangzhou R&F's CFR to B2 reflects the company's
increased refinancing risks because of its weakened access to offshore
funding and sizable amount of maturing debt," says Kaven Tsang,
a Moody's Senior Vice President.
"We expect the company to continue focusing on generating internal
cash to repay 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 generate enough operating
cash flow to materially reduce its debt to more sustainable levels,
given the challenging operating and funding environments,"
adds Tsang.
RATINGS RATIONALE
Guangzhou R&F's B2 CFR reflects the company's long operating
history in China's property market, quality portfolio of urban
redevelopment projects, and geographically diversified land bank
in China. The CFR also reflects the company's modest financial
metrics, despite the company's deleveraging efforts,
and weak liquidity with high refinancing needs.
Guangzhou R&F's liquidity is weak. The company's cash
holdings of RMB28.8 billion (including RMB16 billion restricted
cash) as of June 2021 and estimated operating cash flows through the end
of 2022 will not be sufficient to cover its debt repayments in the next
12-18 months. Therefore, the company will have to
rely on new financing or asset sales to fund its upcoming debt maturities.
While Moody's expects the company to maintain its access to onshore
bank funds, its weakened access to onshore and offshore debt capital
markets will hinder the company's ability to raise new debt at reasonable
costs to repay its maturing bonds. The use of internal resources
to repay maturing bonds will reduce the company's funding available
for its operations, which will restrain its business operations.
The downgrade of R&F HK's CFR to B3 reflects the weakened ability
of its parent to provide financial and operational support in times of
need and the subsidiary's weak standalone credit quality with a
small scale and high exposure to the volatile operating environment of
the hotel business.
R&F HK's CFR B3 rating incorporates its standalone credit profile
and a one-notch uplift based on Moody's assessment of support from
Guangzhou R&F in times of need, because of (1) Guangzhou R&F's
full ownership of R&F HK and its intention to maintain its stake;
(2) R&F HK's role as the primary platform for the group to raise funds
from offshore banks and capital markets to invest in property projects
in China, as well as for overseas investments; (3) Guangzhou
R&F's track record of financial support to R&F HK, including
the provision of keepwell deeds and equity interest purchase undertakings
of R&F HK's guaranteed bonds in recent years; and (4) the reputational
risks for Guangzhou R&F if R&F HK were to default.
R&F HK's liquidity position is also weak. The company relies
on support from Guangzhou R&F to access funding.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the concentrated ownership of Guangzhou R&F's
key shareholders.
Nevertheless, Guangzhou R&F's nine-member board of directors
includes three independent non-executive directors and two non-executive
directors. In addition, the company is subject to other internal
governance structures and standards required under the Corporate Governance
Code for companies listed on the Hong Kong Stock Exchange.
The company is transparent in disclosing its business and financial activities.
Its financial management favors the use of debt leverage that maximizes
return to shareholders, and its dividend payouts are higher than
many of its rated peers'.
Moody's review will focus on (1) Guangzhou R&F's access to funding,
its liquidity and refinancing risks, specifically its ability to
address its maturing debt (including puttable bonds) in a timely manner;
and (2) the company's ability to sustain stable sales and operating cash
flow generation to reduce its leverage on a sustained basis.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could downgrade the rating if Guangzhou R&F's liquidity
and refinancing risks heighten, its access to onshore bank funds
weakens, or if the company fails to materially reduce its debt to
more sustainable levels.
An upgrade of the ratings is unlikely given the review for downgrade.
However, Moody's could confirm the ratings if Guangzhou R&F
shows improvement in its access to funding, materially reduces its
refinancing risks and significantly lowers its debt to more sustainable
levels.
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.
Established in 1994 and listed on the Hong Kong Stock Exchange in 2005,
Guangzhou R&F Properties Co., Ltd. is a large
developer in China's residential and commercial property sector.
As of June 2021, the company had a land bank of 55.5 million
square meters (sqm) in total saleable area, spread across 92 cities
in China and six cities overseas, including Australia, the
UK, Malaysia, Korea, and Cambodia. Mr.
Li Sze Lim and Mr. Zhang Li are the company's co-founders
and owned 28.97% and 27.50% equity interests,
respectively, as of 30 June 2021.
R&F Properties (HK) Company Limited (R&F HK) and its subsidiaries
are principally engaged in the development and sale of properties,
property investments and hotel operations in China. The company
was established in Hong Kong on 25 August 2005. It serves as an
offshore funding vehicle and holding company for some of Guangzhou R&F's
property projects in China.
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Kaven Tsang
Senior Vice President
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.
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077