Hong Kong, May 13, 2022 -- Moody's Investors Service has downgraded Powerlong Real Estate Holdings Limited's corporate family rating to B3 from B2 and senior unsecured rating to Caa1 from B3.
At the same time, Moody's has changed the outlook to negative from rating under review.
These rating actions conclude Moody's review initiated on 25 March 2022.
"The downgrade reflects Powerlong's heightened refinancing risks and weakened liquidity driven by its weak operating cash flow 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 decline over the next 6-12 months because of weak consumer sentiment and challenging operating conditions. This will reduce the company's operating cash flow and, in turn, its liquidity. Powerlong's contracted sales fell 54% year on year for the first four months of 2022.
In addition, Moody's expects Powerlong's liquidity to weaken over the next 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 June 2023.
Moody's expects the company will scale down its land acquisitions and developments, as well as control expenses to preserve liquidity for debt servicing. Powerlong's investment property portfolio will also provide an alternate source of liquidity, as the company could sell these properties to meet its debt obligations in case of need. However, the success of such asset sale would be subject to the volatile market conditions.
Moody's expects Powerlong's credit metrics will weaken over the next 12-18 months. Moody's forecasts the company's debt leverage, as measured by revenue/adjusted debt, will decrease to around 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-2.4x from 2.6x over the same period, driven by the expected declining margin.
Powerlong's B3 CFR continues to reflect the company's long track record of developing mass residential properties in its key markets in China and growing non-development income, which improves the stability of its debt servicing.
However, Powerlong's credit profile is constrained by the company's (1) moderate geographic concentration, (2) execution risks associated with its business expansion, (3) high level of capital demand associated with its business strategy and (4) modest debt leverage.
The Caa1 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 of Powerlong's ratings is unlikely over the next 12 months, given the negative outlook.
However, Moody's could change the outlook to stable if Powerlong improves its liquidity and access to funding and strengthens 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://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.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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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
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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