Hong Kong, March 22, 2022 -- Moody's Investors Service has downgraded Sunac China Holdings Limited's corporate family rating (CFR) to Caa1 from B1, and the company's senior unsecured ratings to Caa2 from B2.
The outlook remains negative.
"The downgrade reflects Sunac's heightened liquidity and refinancing risks given the company's tight funding access amid a challenging operating environment and its large upcoming debt maturities," says Kelly Chen, a Moody's Assistant Vice President and analyst.
The downgrade also reflects Moody's concerns over Sunac's transparency and information disclosure, as well as further negative pressure on the company's funding access, following its recently announced delay in reporting its audited 2021 results.
"The negative outlook reflects the uncertainty over the company's ability to generate new funds, through new borrowing or asset disposals, to address all its debt maturities over the coming 6-12 months amid challenging funding conditions," adds Chen.
RATINGS RATIONALE
Moody's has changed its assessment of Sunac's liquidity profile to weak from adequate, in view of the company's deteriorated operations, constrained access to funding and weakened liquidity buffer. Moody's estimates Sunac's unrestricted cash would decline notably in the first two months of 2022, following a sharp drop in the second half (H2) of 2021, driven by ongoing debt repayments, weak contracted sales, settlement of other obligations, and more stringent restrictions of its escrow accounts. Sunac's access to various funding channels has also significantly deteriorated, as reflected by the sharp decline in its share and bond prices in recent weeks.
On 21 March 2022, Sunac announced that it will not be able to publish the audited annual results for the year ended 31 December 2021 on or before 31 March 2022, as required by the listing rules of Hong Kong Stock Exchange. Instead, Sunac expects it will publish its unaudited preliminary annual financial results on 31 March 2022 [1]. Moody's considers such a delay in reporting the audited financials will further weaken Sunac's funding access, as concerns over the company's corporate governance will further erode market confidence in the company.
Meanwhile, Moody's believes that Sunac will not be able to utilize a significant part of its cash for debt repayment at the holding company level, particularly cash trapped at the project levels. The company has a large amount of debt maturities coming due or puttable before the end of June 2023, including sizable non-bank borrowings, offshore bonds of around USD1.9 billion (approximately RMB12 billion), and onshore bonds of around RMB21 billion. In addition, Sunac could face an acceleration of its offshore borrowings, including privately issued notes, bilateral loans and syndicate loans, which would further pressure Sunac's liquidity. Moody's believes there is an increasing liquidity and default risk for Sunac in view of its large debt maturity in 2022.
Sunac has raised capital through asset sales in the past few months, but Moody's believes Sunac will face increasing uncertainty in its plan for further asset sales, given the challenging market environment. Since October 2021, Sunac has raised more than RMB20 billion of new funds through equity placements, asset and investment disposals, and interest-free loans from controlling shareholders.
Moody's forecasts that Sunac's contracted sales will fall over the next 6-12 months, driven by weak homebuyer confidence amid tight funding conditions and diminished saleable resources following its asset and project disposals. The drop in contracted sales will also weaken the company's financial profile and reduce its operating cash flow and, in turn, its liquidity. Sunac's contracted sales fell 27% year-on-year in the first two months of 2022.
Sunac's Caa2 senior unsecured debt rating is one notch lower than the CFR because of structural subordination risk. Most of Sunac's claims are at the operating subsidiary level and have priority over claims at the holding company in a liquidation scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. Consequently, the expected recovery rate for claims at the holding company is lower.
In terms of environmental, social and governance (ESG) considerations, Sunac's CFR considers the company's concentrated ownership and significant investments in its joint ventures (JVs).
The delay in the release of audited financial results raises concerns over the company's transparency and information disclosure, which is part of Moody's governance considerations and one of the drivers for today's rating action.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely given the negative outlook.
However, the outlook could return to stable if Sunac improves its liquidity substantially.
On the other hand, Moody's could downgrade the company's rating if its liquidity deteriorates further or there is a further material delay in releasing its 2021 annual audited results.
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.
Listed on the Hong Kong Stock Exchange in 2010, Sunac China Holdings Limited is an integrated residential and commercial property developer with projects in China's main economic regions. The company develops a diverse range of properties, including high-rise and mid-rise residences, detached villas, townhouses, retail properties, offices and car parks.
As of the end of June 2021, Sunac's land bank by attributable gross floor area in China, including those of its joint ventures and associates, was 164 million square meters. Its revenue was RMB230.6 billion ($35.5 billion) in 2020.
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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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 www.moodys.com.
REFERENCES/CITATIONS
[1] Sunac's announcement filed to the Hong Kong Stock Exchange dated 21-March-2022
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.
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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
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
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
