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Rating Action:

Moody's downgrades Powerlong to Caa1/Caa2; outlook remains negative

30 Jun 2022

Hong Kong, June 30, 2022 -- Moody's Investors Service has downgraded Powerlong Real Estate Holdings Limited's corporate family rating to Caa1 from B3 and senior unsecured rating to Caa2 from Caa1.

The outlook remains negative.

"The rating downgrades reflect Powerlong's heightened liquidity risks in view of its weakened operations, constrained access to funding and sizable debt maturities over the next 6-12 months," says Cedric Lai, a Moody's Vice President and Senior Analyst.

"The negative outlook reflects the uncertainties over the company's ability to address its refinancing needs amid a tight funding environment," adds Lai.

RATINGS RATIONALE

Moody's expects Powerlong's contracted sales to fall to around RMB60 billion in 2022 from RMB100 billion in 2021 amid weak consumer sentiment and challenging operating conditions. This will reduce the company's operating cash flow and, in turn, its liquidity. The company's contracted sales decreased 55% during the first five months in 2022 to RMB19.0 billion compared with the same period in 2021.

In addition, Moody's expects Powerlong's liquidity to deteriorate over the next 6-12 months as the company will use internal resources to repay maturing debt, absent any new fundraising amid the tough funding environment.

Specifically, Powerlong will have USD200 million of offshore bonds coming due in July 2022, USD100 million in October 2022 and USD300 million in November 2022. The company also has onshore bonds of RMB7.9 billion maturing or becoming puttable before the end of 2023.

Moody's expects Powerlong's investment property portfolio to provide an alternate source of liquidity, as the company could sell these properties to meet its debt obligations in case of need. However, such progress has been slow so far and the success of such asset sales would be subject to the volatile market conditions.

Moody's also expects Powerlong's credit metrics to weaken over the next 12-18 months. Moody's forecasts the company's debt leverage, as measured by revenue/adjusted debt, will decrease to 45%-50% over this period from 52% in 2021, driven by its slower revenue recognition. Similarly, its interest-servicing ability, as measured by EBIT interest coverage, will weaken to 2.0x-2.3x from 2.6x over the same period, driven by the expected declining margin.

Powerlong's Caa1 CFR reflect its long track record of developing mass residential properties in China and growing non-development income. However, Powerlong's credit profile is constrained by the company's (1) weak liquidity; (2) moderate geographic concentration; (3) high level of capital demand associated with its business strategy and (4) weak debt leverage.

The Caa2 senior unsecured debt rating is one notch lower than Powerlong'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 Powerlong's senior unsecured claims in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the likely recovery rate for claims at the holding company will be lower.

In terms of environmental, social and governance (ESG) factors, Moody's has considered the company's concentrated ownership in its controlling shareholders, Hoi Kin Hong and Hoi Wa Fong, who together held a 59% stake in the company as of 31 December 2021. Moody's has also considered the oversight of the company's special committees, of which its audit and remuneration committees are chaired by two independent nonexecutive directors; and the application of the Listing Rules of the Hong Kong Stock Exchange and the Securities and Futures Commission Ordinance in Hong Kong SAR, China to oversee related-party transactions.

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 Powerlong improves its liquidity and access to funding, and strengthens its sales, profitability and credit metrics through the next 12-18 months.

On the other hand, Moody's could downgrade Powerlong's ratings if its liquidity deteriorates 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.

Powerlong Real Estate Holdings Limited is a Chinese property developer focused on building large-scale integrated residential and commercial properties in China. The company, which is 59% owned by the founding Hoi family as of 31 December 2021, listed on the Hong Kong Exchange in October 2009.

As of 31 December 2021, Powerlong's land bank for development totaled around 36.5 million square meters in gross floor area under development and for future development.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.

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Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody's Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.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.

Cedric Lai
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

No Related Data.
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