Hong Kong, October 11, 2021 -- Moody's Investors Service has downgraded the corporate family rating
(CFR) of Modern Land (China) Co., Limited (Modern Land) to
Caa2 from B2. At the same time, Moody's has downgraded
to Caa3 from B3 the senior unsecured rating on the bonds issued by Modern
Land.
Moody's has also placed all the ratings on review for further downgrade.
The outlook has been changed to ratings under review from stable.
"The downgrade follows Modern Land's proposed consent solicitation
to seek its bondholders' consent to defer the repayment of part
of its USD250 million notes due on 25 October 2021, reflecting its
rapidly deteriorating liquidity," says Celine Yang,
a Moody's Vice President and Senior Analyst.
"The review for downgrade reflects the uncertainty over the company's
ability to repay all of its debt maturity in the coming 6-12 months,"
adds Yang.
RATINGS RATIONALE
On 11 October 2021, Modern Land announced a solicitation of consents
to obtain the requisite consent from bondholders to amend the indenture
to extend the maturity date of its outstanding USD250 million bond to
25 January 2022 from 25 October 2021. It also sought to (1) shorten
the notice period of optional redemption to redeem the bond; and
(2) redeem USD87.5 million (equivalent to round 35% of the
outstanding principal) of the bond on the maturity date of 25 October
2021.
The announced consent solicitation will require delivered consent from
noteholders of not less than 90% in aggregate principal amount
of the outstanding notes, and will expire on 20 October 2021.
The consent solicitation reflects Modern Land's very tight liquidity
position despite its reported unrestricted cash on hand of RMB13.6
billion as of end of June 2021.
Moody's expects the company's cash holdings and operating cash flow will
be insufficient to cover its debt maturities and committed land premiums
in the next 12-18 months, given an expected deterioration
in its operations amid weak market conditions, as reflected in the
decline of nationwide property sales. The sharp declines in the
company's bond and share prices recently also limit its access to
capital market funding for refinancing.
Modern Land's Caa2 CFR reflects the company's niche in marketing
and selling comfortable and eco-friendly homes. However,
the rating is constrained by the company's weak liquidity and financial
metrics, as well as constrained funding access and significant exposure
to non-bank borrowings.
Moody's notes that Modern Land has said its controlling shareholders,
Mr. Zhang Lei and Mr. Zhang Peng, plan to provide
a shareholder loan of around RMB800 million within the next two to three
months.
The proposed shareholder loan demonstrates the shareholders' support
and will alleviate part of the company's liquidity pressure,
if completed. However, the timing of executing the support
remains uncertain.
In terms of environmental, social and governance (ESG) considerations,
Moody's has considered the company's weak financial management.
The rating also considered the company's concentrated ownership by its
key shareholders by its founder and chairperson, Zhang Lei,
who held around a 66.1% stake as of the end of June 2021.
Modern Land's Caa3 senior unsecured debt rating is one notch lower
than the company's Caa2 CFR due to structural subordination risk.
The subordination risk refers to the fact that the majority of Modern
Land's claims are at its operating subsidiaries and have priority over
claims at the holding company in a bankruptcy scenario. In addition,
the holding company lacks significant mitigating factors for structural
subordination. Consequently, 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
Moody's will review (1) the result of the announced consent solicitation
and the associated credit implications on Modern Land, and (2) Modern
Land's abilities to restore its liquidity position through repaying
or refinancing the upcoming debt maturities over the next 12-18
months, including the USD250 million due on 25 October 2021,
the USD200 million due on 26 February 2022 and the USD300 million due
on 13 November 2022.
Moody's could downgrade the ratings further if Modern Land fails
to secure consent from bondholders to extend the debt maturity of its
USD250 million bond, or if the recovery prospects of the company's
creditors deteriorate.
An upgrade of the ratings is unlikely, given the review for downgrade.
However, Moody's could confirm the ratings if Modern Land
materially improves its liquidity and access to funding.
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.
Modern Land (China) Co., Limited was founded in Beijing in
2000 by Mr. Zhang Lei, who is the company's current chairman.
The company specializes in developing green housing units and is among
the few early leaders in China's green and eco lifestyle market.
Modern Land was listed on the Hong Kong Stock Exchange in July 2013.
As of June 2021, the company had a gross land bank of around 16.8
million square meters in terms of gross floor area.
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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
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
