Hong Kong, September 29, 2022 -- Moody's Investors Service has downgraded the corporate family rating (CFR) of Zhenro Properties Group Limited to Ca from Caa2, and the company's senior unsecured ratings to C from Caa3.
The outlook remains negative.
"The downgrade reflects our expectation of weak recovery prospects for Zhenro's bondholders following the company's default on the interest payments of its USD bonds," says Alfred Hui, a Moody's Analyst.
"The negative outlook reflects our view that the recovery prospects for Zhenro's creditors could weaken further if the interest payment default extends to a wider default of other debts," adds Hui.
RATINGS RATIONALE
Moody's notes that Zhenro has missed the interest payments on some of its offshore bonds. The rating agency also believes the company has not settled the missed interest payments within the 30-day grace period, resulting in interest payment defaults.
The interest payment default reflects the company's weak liquidity and constrained financial flexibility. As of the end of June 2022, Zhenro's unrestricted cash balance declined significantly to RMB3.1 billion from RMB14.7 billion from the end of 2021 due to the repayment of maturing debt and weak operating cash flow. Zhenro would have to rely on asset disposals or other fundraising plans for debt servicing. However, these fundraising activities entail high uncertainties.
Zhenro's C senior unsecured bond rating is one notch lower than its Ca CFR because of the risk of structural subordination. This risk reflects the fact that most of the claims are at the operating subsidiary level and have priority over claims at the holding company level in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the expected recovery rate for claims at the holding company will be lower.
In terms of environmental, social and governance (ESG) factors, Moody's has considered the company's aggressive financial management and weak liquidity management with its history of conducting distressed exchanges to preserve liquidity. It further considers the company's poor management credibility given its track record of corporate actions that are inconsistent with its market guidance. Moody's has also considered the company's concentrated ownership by Mr. Ou Zongrong and his family members, which together held a 59.6% stake in the company as of 22 July 2022.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could further downgrade Zhenro's CFR if the recovery prospects for its creditors deteriorate.
An upgrade is unlikely given the negative outlook.
However, positive rating momentum could develop if Zhenro repays its maturing debt and improves its liquidity position materially.
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.
Zhenro Properties Group Limited was incorporated in the Cayman Islands in 2014 and listed on the Hong Kong Stock Exchange in January 2018. As of 30 June 2022, Zhenro had a total land bank with a gross floor area of 22.15 million square meters in China.
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.
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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.
Alfred Hui
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
