Hong Kong, July 26, 2022 -- Moody's Investors Service has downgraded to Ba3 from Ba2 Seazen Group Limited's (Seazen Group) corporate family rating (CFR) and to B1 from Ba3 the backed senior unsecured rating on the bonds guaranteed by Seazen Group and issued by New Metro Global Limited.
Moody's has also downgraded to Ba3 from Ba2 the backed senior unsecured rating on the bonds guaranteed by Seazen Holdings Co., Ltd. (Seazen Holdings) and issued by New Metro Global Limited.
Moody's has changed all the rating outlooks to negative from ratings under review.
At the same time, Moody's has withdrawn Seazen Holdings' CFR because Seazen Holdings accounts for the majority of Seazen Group's operations, and its credit quality has already been reflected in Seazen Group's Ba3 CFR. The rating and outlook of Seazen Holdings was Ba2 and ratings under review before the withdraw.
Seazen Group operates mainly through Seazen Holdings, its 67%-owned subsidiary, which accounts for 99% of Seazen Group's revenue and total assets.
This concludes the review for downgrade initiated on 13 May 2022.
"The rating downgrade reflects Seazen Group's declining property sales and credit metrics, as well as reduced financial flexibility amid the difficult operating and funding conditions in China's property sector," says Kelly Chen, a Moody's Vice President and Senior Analyst.
"The negative outlook reflects uncertainties over Seazen Group's ability to raise new unsecured long-term funding to maintain its liquidity buffer," adds Chen.
RATINGS RATIONALE
Seazen Group's CFR reflects the company's established market position in Yangtze River Delta and growing stream of recurring rental income, which to some extent supports its cash flow stability.
The rating is, however, constrained by the company's declining sales, weakening credit metrics and financial flexibility, and significant exposure to joint ventures (JVs), which weakens its corporate transparency and increase contingent liabilities.
Moody's expects Seazen Group's gross contracted sales to fall around 30% to around RMB165 billion in 2022, after declining 7% to RMB234 billion in 2021. The drop in contracted sales will reduce the company's operating cash flow. In the first six months of 2022, Seazen Group's contracted sales decreased 45% due to weak market sentiment and COVID-led disruptions.
The company will also have to offer price discounts to support its contracted sales amid the difficult market conditions, thereby pressuring its profit margins.
Moody's forecasts Seazen Group's gross margin will fall to 15%-16% over the next 12-18 months from 17% in 2021. Coupled with a projected decline in revenue, Seazen Group's EBIT/interest coverage will fall to below 3.0x over the next 12-18 months from 3.7x in 2021.
Meanwhile, Moody's projects Seazen's investment property (IPs) will generate RMB5.0 billion-RMB5.5 billion in recurring rental income (excluding commercial property management fees) over the next 12-18 months. This income will cover 80%-100% of its gross interest expenses over the same period.
Moody's expects Seazen group's liquidity to remain adequate. Its unrestricted cash of RMB46.6 billion as of December 2021 and projected operating cash flow will be sufficient to cover its maturing debt, including USD1.4 billion of offshore bonds and RMB12.2 billion onshore bonds becoming mature or puttable before the end of 2023. However, the use of internal resources to repay maturing debt could continue to weaken its liquidity buffer over time.
Moody's notes that Seazen Group has recently issued a 3-year onshore medium-term-note (MTN) of RMB1 billion with 6.5% coupon and a put option at the end of the second year after issuance, as well as a 364-day offshore bond of USD100 million with 7.95% coupon. However, Moody's sees uncertainties for Seazen Group to consistently issue long-term unsecured bonds in meaningful amounts over the next 6-12 months, given weak market sentiment.
Seazen Group has also actively raised onshore bank loans by pledging its IPs over the past three months. While this financing would provide the company with alternative liquidity, the increase in encumbrance of its assets, alongside uncertainties in its ability to issue unsecured debt, would reduce the company's financial flexibility.
From a governance perspective, Seazen Group's ownership is concentrated in its former chairman, who holds a 69.6% stake in Seazen Group. Moody's has considered the company's established management team as well as its good institutional governance structures and standards as required by the Hong Kong and Shanghai stock exchanges, where the company is listed.
The senior unsecured bonds guaranteed by Seazen Group are rated at B1, one notch lower than the CFR, due to 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.
On the other hand, the senior unsecured bonds guaranteed by Seazen Holdings are rated at Ba3, reflecting that creditors of Seazen Holdings are closer to the assets and have higher priority of claims over the creditors of Seazen Group in a liquidation scenario. They also directly 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the ratings is unlikely in the near term, given the negative outlook.
However, Moody's could revise Seazen Group's rating outlook to stable if the company strengthens its access to long-term funding, improves sales, financial metrics, rental income and maintains sufficient liquidity.
Moody's could downgrade Seazen Group's ratings if its liquidity and access to funding further deteriorates; its contracted sales decline more than Moody's expectation such that its credit metrics weaken, such as EBIT/interest coverage falling below 2.75x-3.0x on a sustained basis.
Downward pressure could also increase if the company's contingent liabilities associated with its JVs or the likelihood of the group providing funding support to the JVs increases significantly.
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.
Seazen Group Limited operates primarily in residential development in China. Seazen Group was founded in 1996 by Wang Zhenhua, the former chairman of Seazen Group. 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 across 129 cities in China, with a total gross floor area of 138 million square meters as of the end of 2021.
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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
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 entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
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.
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
