Hong Kong, April 28, 2022 -- Moody's Investors Service has downgraded Zhongliang Holdings Group Company Limited's corporate family rating (CFR) to Caa2 from B3.
The outlook remains negative.
"The rating downgrades reflect Zhongliang's heightened liquidity risk following its proposed exchange offer and consent solicitation to its noteholders," says Cedric Lai, a Moody's Vice President and Senior Analyst.
"The negative outlook reflects the uncertainty over the company's ability to address its near-term debt maturities amid challenging funding conditions," adds Lai.
RATINGS RATIONALE
On 28 April 2022, Zhongliang announced an exchange offer and consent solicitation to its bondholders for the company's USD senior notes due in May 2022 and July 2022[1]. The company said that it may not be able to fully redeem the notes upon maturity if either the exchange offer and consent solicitation is not successfully completed.
The proposed exchange offer indicates Zhongliang's liquidity stress amid a difficult operating environment, tight funding condition and the company's large offshore bonds maturity of about USD900 million before the end of December 2022.
Zhongliang had unrestricted cash of RMB20.3 billion as of the end of December 2021, but Moody's estimates that a significant portion of such cash resides at the operating project levels, which could not be used to repay its debt at the holding company level, particularly the offshore bonds. In addition, the company has a high exposure to joint ventures, which could limit its ability to control its cash flow.
Moody's expects Zhongliang's contracted sales to decline notably over the next 6-12 months, driven by weak homebuyer confidence and tight funding conditions. Specifically, the company's contracted sales declined 55% in the first quarter of 2022 from the same period last year. This will, in turn, reduce the company's operating cash flow for debt repayment.
Zhongliang's Caa2 CFR reflects the company's weak liquidity over the next 12-18 months, and Moody's expectation that the company will face difficulties in raising new funds from onshore and offshore channels to address its refinancing needs amid tight funding conditions.
In terms of environmental, social and governance (ESG) considerations, Moody's has considered the risk associated with the ownership concentration in Zhongliang's controlling shareholders, Mr. Yang Jian and his spouse, who together held an 80.5% stake as of 31 December 2021. Moody's has also considered the presence of three independent non-executive directors on a board of seven directors, and two independent non-executive directors who chair the audit and remuneration committees, respectively, and the application of the listing rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance in Hong Kong.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade is unlikely given the negative outlook.
However, the outlook could return to stable if Zhongliang improves its funding access and materially reduces its refinancing risks.
On the other hand, Moody's could downgrade the rating if the company's liquidity and refinancing risks heighten, or if the recovery prospects for its creditors deteriorate.
The principal methodology used in this rating 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.
Zhongliang Holdings Group Company Limited is a Shanghai-based residential property developer. The company engages in real estate development in China. The Yangtze River Delta region contributed 52.2% of the company's contracted sales in 2021.
As of 31 December 2021, Zhongliang was 80.5% owned by its chairman, Mr. Yang Jian and his spouse, who were acting in concert.
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] Zhongliang's announcement filed on Stock Exchange of Hong Kong 28-Apr-2022
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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.
Cedric Lai
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
Kaven Tsang
Senior Vice President
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
