Hong Kong, May 13, 2022 -- Moody's Investors Service has downgraded Seazen Group Limited's corporate family rating (CFR) to Ba2 from Ba1, its senior unsecured rating to Ba3 from Ba2, and the backed senior unsecured rating on the bonds issued by New Metro Global Limited and guaranteed by Seazen Group to Ba3 from Ba2.
Moody's has also downgraded Seazen Holdings Co., Ltd.'s CFR to Ba2 from Ba1, and the backed senior unsecured rating on the bonds issued by New Metro Global Limited and guaranteed by Seazen Holdings to Ba2 from Ba1.
At the same time, Moody's has placed all the ratings on review for further downgrade.
The rating outlooks were changed to ratings under review from negative.
Seazen Holdings is a 67%-owned subsidiary of Seazen Group, accounting for 99% of Seazen Group's revenues in 2021 and 86% of its debt as of year-end 2021. The two companies are collectively referred to as "Seazen".
"The rating downgrades reflect Seazen's (1) weakening sales and financial metrics, (2) lower liquidity buffer and constrained funding access, and (3) reduced financial flexibility because of its increasing use of internal resources and secured financing to repay maturing debt," says Kelly Chen, a Moody's Vice President and Senior Analyst.
"The review for downgrade reflects the uncertainty over the company's ability to raise new financings, especially unsecured financing, to restore is liquidity buffer and financial flexibility," adds Chen.
RATINGS RATIONALE
Moody's expects Seazen's weakening sales and operating cash flow and its use of internal resources to repay maturing debt will rapidly strain its liquidity buffer, if it is unable to raise new financing.
Seazen will have USD1.1 billion of offshore bonds and RMB3.9 billion onshore bonds becoming mature or puttable before end of 2022. Moody's expects Seazen will repay these maturing debts mainly via its internal resources, which will reduce the funding available to support its operations. Moody's also believes the company will scale down land acquisitions and developments, as well as control expenses to preserve liquidity for debt servicing.
The company had unrestricted cash of RMB46.6 billion at end of 2021, but part of the cash would have to be kept at the project level and cannot be mobilized immediately when needed.
Moody's notes that the company has actively managed its refinancing needs through new financing, especially onshore bank loans secured by its investment properties (IPs). However, an increasing usage of secured financing will lower the company's financial flexibility and potentially increase the subordination risks to its senior unsecured creditors.
Moody's expects Seazen's gross contracted sales will decline significantly to around RMB165 billion and RMB150 billion in 2022 and 2023 respectively, after recording a 7% decline to RMB234 billion in 2021. In the first four months of 2022, Seazen's contracted sales declined by 44% due to weak market sentiment and disruptions caused by coronavirus lockdowns. The company will also have to offer price discounts to support its contracted sales amid the difficult market conditions, thereby pressuring its profit margins.
As a result, Seazen Group's EBIT/interest coverage will fall to around 3.0x-3.5x in the next 1-2 years from 3.7x for 2021. This projected metric no longer supports its previous Ba1 CFR.
Seazen's CFRs continue to reflect the company's established market position in Yangtze River delta, and growing stream of recurring rental income that supports its cash flow stability.
Seazen Group will generate RMB5.0 billion-RMB5.5 billion in recurring rental income (excluding commercial properties management fee) in 2022 and in 2023. This rental income can cover 80%-100% of its gross interest expenses over the same period.
However, Seazen's CFRs are constrained by its narrow profit margin, weakened access to debt capital market funds, and significant exposure to its joint ventures (JVs), which increases the company's contingent liabilities and limits its corporate transparency.
From a governance perspective, the companies' ownership is concentrated in its former chairman, who holds a 69.6% stake in Seazen Group, which in turn owns 67.1% in Seaszen Holdings as of year-end 2021. Moody's has considered the companies' established management team as well as their good institutional governance structures and standards as required by the Hong Kong and Shanghai stock exchanges, on which the companies are, respectively, listed.
Seazen Group's senior unsecured bond rating is one notch lower than its CFR because of structural subordination risk. Most of Seazen Group's claims are at the subsidiary level 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.
Seazen Holdings' senior unsecured bond rating is not notched down for structural subordination. Although it is an intermediate holding company with most claims at the operating subsidiaries and project level, creditors of Seazen Holdings benefit from the group's diversified business profile, with cash flow generation across a large number of operating subsidiaries with high geographic diversification, as well as its portfolio of investment properties. That said, raising new funding by securing investment properties could potentially increase subordination risk to its senior unsecured notes holders.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's will review (1) Seazen's access to new funding, and its liquidity and refinancing risks, specifically its ability to raise unsecured financing to address its maturing debt (including puttable bonds) while maintaining adequate liquidity; (2) its ability to sustain its operating and financial profiles through the property market downcycle; and (3) any change in the subordination risks of its senior unsecured creditors as the company uses secured financing to repay the maturing unsecured bonds.
An upgrade of Seazen Group's and Seazen Holdings' ratings is unlikely, given they are on review for downgrade. However, Moody's could confirm the ratings if the companies' access to funding improves, and if they can maintain stable contracted sales, rental income, credit metrics and good liquidity.
Moody's could downgrade Seazen Group's and Seazen Holdings' ratings if the companies' liquidity and access to funding further deteriorates; their contracted sales decline more than Moody's expectation such that their credit metrics weaken, with their EBIT/interest coverage falling below 3.0x-3.5x or their rental income/interest declining below 50%, all on a sustained basis.
Downward pressure could also increase if the companies' contingent liabilities associated with their JVs or the likelihood of them providing funding support to the JVs increases significantly.
Moody's could also downgrade the senior unsecured ratings for both Seazen Group and Seazen Holdings if subordination risks heighten.
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.
Seazen Group Limited operates through its 67.1%-owned mainland subsidiary, Seazen Holdings, and engages primarily in residential development in China. Seazen Group was founded in 1996 by Wang Zhenhua, the former chairman of Seazen Group and Seazen Holdings. Wang Zhenhua is the largest shareholder of Seazen Group, holding a 69.6% stake in the company, and has been involved in the property development business in China (A1 stable) since 1993. The company had a land bank spread 129 cities in China, with a total gross floor area (GFA) of 138 million square meters at end of 2021.
REGULATORY DISCLOSURES
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Chen Chen
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
