Hong Kong, July 08, 2019 -- Moody's Investors Service has downgraded Yihua Enterprise (Group)
Co., Ltd.'s (Yihua Group) corporate family rating
(CFR) to Caa1 from B3.
At the same time, Moody's has downgraded to Caa2 from Caa1 the backed
senior unsecured rating on the senior unsecured notes issued by Yihua
Overseas Investment Ltd and guaranteed by Yihua Group.
The ratings outlooks for both Yihua Group and Yihua Overseas Investment
Ltd remain negative.
RATINGS RATIONALE
"The ratings downgrade reflects Yihua Group's heightened liquidity
risk, following the legal action by a lender of the company freezing
certain shares of the company's key subsidiary, Yihua Lifestyle
Technology," says Ying Wang, a Moody's Vice President
and Senior Analyst.
"The downgrade also takes into account the company's high
refinancing needs over the next 12-18 months," adds
Wang.
On 2 July 2019, Yihua Lifestyle disclosed that Tianjin Kanghong
Medical Investment Co. Ltd. filed a petition to the Third
Intermediate People's Court of Tianjin to freeze shares equivalent
to a 19% shareholding in Yihua Lifestyle. Moody's
is concerned that there may be further legal actions.
If the freeze and ensuing legal actions are not resolved quickly,
it will negatively impact Yihua Group's financial position and ability
to raise funding from the domestic bank and capital markets.
Yihua Lifestyle was 29% owned by the Yihua Group at the end of
2018, and represents a key part of the company's earnings
and assets. Moody's estimates that Yihua Lifestyle accounted
for 48% and 32% of the company's consolidated EBITDA
and assets respectively, at the end of 2018.
Moody's points out that Yihua Group's liquidity position is
already weak. It held cash of around RMB5.4 billion at 31
March 2019, but had RMB6.0 billion in debt maturing over
the next 12 months, and RMB2.3 billion of puttable bonds
in the same period.
The freezing of certain Yihua Lifestyle shares, and the company's
weak liquidity position, will result in increasing repayment risk
and therefore the downgrade of Yihua Group's CFR to Caa1.
Yihua Group's Caa1 CFR reflects the company's high liquidity risk,
private company status, and weak control over its furniture and
healthcare businesses, due to partial ownerships.
The Caa2 senior unsecured rating on the bonds is one notch lower than
the CFR, due to structural subordination risk. This risk
reflects the fact that the majority of claims are at the company's
operating subsidiaries. These claims have priority over Yihua Group's
senior unsecured claims in a bankruptcy scenario.
With respect to environmental, social and governance risks,
Moody's considers that the Yihua Group faces moderate corporate
governance risk, because of its private company status and concentrated
ownership — with 100% of the company owned by a family —
and its aggressive financial management, by pledging significant
shareholdings of its key operating subsidiary.
The ratings outlook is negative, reflecting uncertainty over the
company's ability to arrange funding on a timely basis to meet its
near-term debt repayments.
The company is not under any ratings upgrade pressure, given the
negative ratings outlook.
Nevertheless, the ratings outlook could return to stable,
if Yihua Group (1) resolves the freeze and any ensuing legal actions related
to the pledged Yihua Lifestyle shares, and (2) improves its liquidity
position, by refinance its maturing debt over the coming 12-18
months.
Downward ratings pressure could emerge, if Yihua Group defaults
on its debt repayments.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Yihua Enterprise (Group) Co., Ltd. was established
in April 1995 and is based in Shantou, China.
Yihua Group is a diversified private company that operates in four key
segments: (1) furniture manufacturing, (2) healthcare,
(3) property development, and (4) financial investment.
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
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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
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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
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For any affected securities or rated entities receiving direct credit
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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The first name below is the lead rating analyst for this Credit Rating
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Ying Wang
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
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Client Service: 852 3551 3077
Kaven Tsang
Senior Vice President
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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