Hong Kong, March 03, 2022 -- Moody's Investors Service has downgraded KWG Group Holdings Limited's
corporate family rating (CFR) to B2 from B1.
At the same time, Moody's has changed KWG's rating outlook
to negative from stable.
"The rating downgrade reflects KWG's weakening contracted sales
and heightened refinancing risks due to its sizable debt maturities amid
a tight funding environment," says Celine Yang, a Moody's
Vice President and Senior Analyst.
"The negative outlook reflects our expectation that the company's operations
and liquidity will weaken over the next 12-18 months," adds
Yang.
RATINGS RATIONALE
Moody's revised its assessment on KWG's liquidity to weak
from adequate, in view of its sizable maturing debt in the next
6-12 months and the rating agency's expectation of a decline
in the company's contracted sales amid difficult funding and operating
environments, which will pressure KWG's operating cash flow
and, in turn, its liquidity.
Specifically, KWG will have around USD900 million of offshore bonds
maturing before the end of 2022. But the company is unlikely to
issue new bonds at reasonable costs to refinance these bonds, given
its weakened funding access.
KWG had unrestricted cash of RMB42.6 billion as of the end of June
2021. However, Moody's believes the company will not
be able to fully mobilize all the cash for debt repayment at the holding
company level as it has to keep a considerable amount of cash at the project
level.
KWG has a large exposure to joint venture (JV) projects, which lowers
its corporate transparency and increases uncertainty over its ability
to control its project cash flow. The company also has a large
amount of contingent liabilities related to its JVs, totaling RMB27
billion as of the end of June 2021.
Moody's expects KWG will endeavor to repay the maturing debt with
internal cash, but the company will likely have to raise funds through
asset sales or pledging its investment property portfolio as alternative
sources to replenish its liquidity.
Moody's forecasts that KWG's contracted sales will fall 10%-15%
over the next 1-2 years, driven by weak homebuyer confidence
amid tight funding conditions. The decline in contracted sales
will also strain the company's financial profile and liquidity.
Although KWG's contracted sales remained flat at around RMB103 billion
in 2021 compared with that in 2020, its sales dropped significantly
by 29% in the second half (H2) of 2021 as the market deteriorated,
compared with that during the same period a year ago.
Moody's projects KWG's revenue/adjusted debt and EBIT/interest
coverage will remain weak at 25%-30% and around 2.3x,
respectively, in the coming 12-18 months, from 27%
and 2.3x for the 12 months ended June 2021.
KWG's B2 CFR reflects the company's strong brand name in its main
operating regions and good operating track record, as well as its
quality land bank, which focuses on tier 1 and tier 2 cities.
Meanwhile, its rating is constrained by the company's high
leverage, and sizable exposure to its JVs.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered the concentration of KWG's ownership by its
controlling shareholders, Kong Jianmin and his family, who
held a total stake of 63% in the company as of 30 June 2021.
Moody's has also considered (1) the company's adherence to the internal
governance structures and disclosure standards under the Corporate Governance
Code for companies listed on the Hong Kong Stock Exchange; (2) the
presence of audit, remuneration and nomination committees,
with the first two chaired by independent nonexecutive directors (INEDs)
and the audit committee comprising solely of INEDs.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade is unlikely, given the negative outlook.
However, Moody's could return KWG's rating outlook to stable
if the company improves its liquidity, access to funding and operating
cash flow.
Credit metrics that could indicate a stable rating outlook include EBIT/interest
coverage above 2.0x and unrestricted cash/short-term debt
above 1.5x, both on a sustained basis.
On the other hand, Moody's could downgrade the rating if the company's
liquidity and financial profiles deteriorate due to (1) a significant
decline in contracted sales and cash collections; or (2) a material
increase in the company's debt or contingent liabilities.
Credit metrics indicative of a downgrade include unrestricted cash to
short-term debt falling below 1.0x and EBIT/interest coverage
below 1.5x, both on a sustained basis.
The principal methodology used in this rating 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.
KWG Group Holdings Limited (KWG) is a Chinese property developer that
was founded in 1995. As of 30 June 2021, the company had
a total attributable land bank of 25.6 million square meters in
gross floor area (GFA) across 41 cities in China, which can support
three to five years of development. KWG mainly develops medium-
to high-end residential properties, office buildings,
shopping malls and hotels.
KWG listed on the Hong Kong Stock Exchange in July 2007. Its chairman,
Kong Jianmin, and his family owned about 63% of the company
as of 30 June 2021.
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YuYing (Celine) Yang
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
