Hong Kong, April 07, 2016 -- Moody's Investors Service has downgraded SOHO China Limited's corporate
family rating and the senior unsecured debt rating on its bonds due November
2022 to Ba3 from Ba2.
The ratings outlook is negative.
This action concludes the rating review initiated on 14 March 2016.
RATINGS RATIONALE
"The downgrades reflect Moody's expectation that SOHO China's credit metrics
will remain weak for the next 12 -- 18 months," says Stephanie
Lau, a Moody's Assistant Vice President and Analyst.
SOHO China's credit metrics had already deteriorated in 2015,
as EBITDA/interest coverage declined to 0.7x-0.8x
-- after excluding fees related to the company's senior
notes' tender and consent solicitation -- from 3.1x
in 2014. Moreover, net debt/EBITDA rose to 9.4x from
2.3x.
This worst-than-expected deterioration in credit metrics
was the result of a substantial decline in development revenue of RMB5.6
billion in 2015, and which could not be offset by a 148%
rise in rental income to RMB1.05 billion.
Development revenue fell because of SOHO China's shift to a build-and-hold
strategy from a build-to-sell model. Such a strategy
exposes the company to execution risks and Moody's expects its credit
metrics to remain pressured.
EBITDA/interest coverage and net debt/EBITDA will remain weak at around
0.8x-1.0x and 10x-11x respectively in 2016,
levels which do not support a Ba2 corporate family rating.
Moody's expects uncertainty over whether SOHO China can successfully
ramp up its Guanghualu SOHO II, Hongkou SOHO, and Bund SOHO
projects over the next 12-18 months and whether the consequent
rise in rental income can counter the expected further deterioration in
credit metrics.
"The negative rating outlook reflects uncertainty over whether the
company can successfully ramp up its leases to improve its credit metrics
against the backdrop of the slowdown in China's economy,"
adds Lau who is also the Lead Analyst for SOHO China.
It also reflects the consideration that company's liquidity position
could weaken if it continues with dividend distributions and capital spending
at levels seen in 2015.
SOHO China's Ba3 corporate family is constrained by execution risks
related to the development of its investment property portfolio,
but -- at the same time -- reflects its track record
of developing commercial properties in Beijing and Shanghai's prime locations.
SOHO China's liquidity position is adequate. Its cash holdings
of around RMB9.0 billion at end-2015 were sufficient to
cover short-term debt of around RMB1.9 billion.
But Moody's expects the company's cash position to decline
in the near future because it has announced plans to redeem in full its
outstanding senior notes of USD253 million due 2022 on 6 June 2016.
Upgrade rating pressure is unlikely in the near term, given the
negative outlook.
However, the rating outlook could return to stable if SOHO China
(1) successfully ramps up the leases of its investment properties;
and/or (2) improves EBITDA/interest to above 1.25 - 1.5x
and debt/total assets to below 25%.
On the other hand, downgrade pressure could emerge if SOHO China
shows (1) a material weakening in liquidity; (2) delays in ramping
up the leases of its investment properties; or (3) weak credit metrics,
that is, debt/total assets rises above 30% or EBITDA/interest
is unlikely to trend above 1.25x -- 1.5x in 2017.
The principal methodology used in these ratings was Global Rating Methodology
for REITs and Other Commercial Property Firms published in July 2010.
Please see the Ratings Methodologies page on www.moodys.com
for a copy of this methodology.
SOHO China Limited, incorporated in March 2002 and listed on the
Hong Kong Stock Exchange in October 2007, develops, leases
and manages commercial properties in the core business districts in Beijing
and Shanghai.
The Local Market analyst for this rating is Cindy Yang, +86
(10) 6319-6570.
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.
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
the rating.
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.
Stephanie Lau
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
SUBSCRIBERS: (852) 3551-3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077
Moody's downgrades SOHO China's ratings to Ba3; outlook negative