Hong Kong, November 26, 2018 -- Moody's Investors Service has downgraded to B3 from B2 the corporate
family rating (CFR) of LVGEM (China) Real Estate Investment Co.
Ltd., and to Caa1 from B3 the backed senior unsecured rating
of the notes issued by Gemstones International Limited --
a wholly owned subsidiary of LVGEM -- and guaranteed by LVGEM.
The outlooks on all ratings are changed to stable from negative.
RATINGS RATIONALE
"The downgrade reflects our assessment that LVGEM is unlikely to reverse
its weakening liquidity position over the next 12-18 months,
which in turn raises financial risk amid tight credit conditions in China,"
says Celine Yang, a Moody's Assistant Vice President.
As of June 2018, LVGEM's cash balance of RMB5.4 billion
(including RMB2.9 billion unrestricted and RMB2.5 billion
restricted) was insufficient to cover its short-term debt of RMB4.6
billion and RMB2.6 billion in onshore bonds that will become puttable
in August 2019.
Moody's also expects the company's cash generation of around RMB6.5-RMB7
billion from contracted sales and rentals will be insufficient to cover
LVGEM's expenditures over the next 12-15 months, including
land premiums and construction costs of around RMB5.5-RMB6.0
billion, sales administration expenses of RMB1 billion and interest
and taxes of RMB3 billion for projects.
Moreover, LVGEM's cash flow is reliant on the success of its
contracted sales from the Mangrove Bay No. 1 project, leaving
it vulnerable to the risk of regulatory changes in Shenzhen.
Tight conditions in China's credit markets and risk-averse
sentiment in the offshore bond markets could make it difficult for the
company to raise new borrowings in the near term.
LVGEM's B3 CFR reflects its established track record in urban redevelopment
projects, its high profit margins and core projects located in the
first tier city Shenzhen.
The B3 rating also considers the company's ownership in investment
properties which provide it with stable cash inflows.
Moody's expects that LVGEM's rental income will grow to RMB600-RMB650
million in 2019-2020 from RMB534 million for the 12 months to 30
June 2018, because of its newly opened Zoll shopping centres (International
Garden and Hongwan).
Its recurring income/interest coverage will likely remain at 0.35x-0.37x
for the next 12-18 months compared to the 0.47x for the
12 months ended June 2018.
Furthermore, its investment properties in China and Hong Kong provide
the company with an alternate source of liquidity in case of financial
stress, as it could sell the properties to meet its debt obligations.
However, the B3 CFR is constrained by the company's weak liquidity,
high debt leverage, and small operating scale.
Moody's expects LVGEM's debt leverage -- as measured
by adjusted debt to book capitalization -- will remain high
at 60%-65% over the next 12-18 months,
compared to 60% for the 12 months ended June 2018. Deleveraging
is unlikely as the company will need to fund its capital expenditures
in the coming 12-18 months.
The Caa1 senior unsecured bonds rating backed by LVGEM, is one notch
lower than the CFR because of the risk of structural subordination.
This risk reflects Moody's expectation that the majority of claims will
be at the level of the operating subsidiaries and will 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.
The stable outlook reflects Moody's expectation that LVGEM will address
its liquidity requirements by maintaining contracted sales at its budget
level, and by disposing of assets to meet its debt obligations if
refinancing becomes difficult in the next 12 months.
The rating could be upgraded if (1) LVGEM improves its liquidity position
and achieves sustained contracted sales growth, and EBIT/interest
coverage rises above 2.0x-2.5x on a sustained basis;
and (2) the company shows a track record of access to term funding both
in the offshore and onshore markets.
On the other hand, downward rating pressure could arise if LVGEM's
liquidity position further deteriorates due to (1) a material decline
in contracted sales; or (2) difficulty in refinancing its maturing
debt over the next 6-12 months.
The principal methodology used in these ratings was Homebuilding And Property
Development Industry published in January 2018. Please see the
Rating Methodologies page on www.moodys.com for a copy of
this methodology.
LVGEM (China) Real Estate Investment Co. Ltd. listed on
the Hong Kong Stock Exchange in November 2015. At the end of June
2018, LVGEM had an attributable land bank of around 4 million square
meters across Shenzhen, Hong Kong, Zhuhai, Suzhou,
and Huazhou.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
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Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
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.
YuYing (Celine) Yang
Asst Vice President - 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
Gary Lau
MD - Corporate Finance
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
