Hong Kong, May 30, 2022 -- Moody's Investors Service has placed Country Garden Holdings Company Limited's Baa3 issuer rating and senior unsecured rating on review for downgrade. The outlook is changed to ratings under review from negative.
"The review for downgrade reflects Moody's expectation that Country Garden's credit metrics will weaken due to a sales decline amid a challenging operating environment, while the company's access to offshore funding will remain restricted over the next 12-18 months. These factors would pressure the company's Baa3 ratings," says Kaven Tsang, a Moody's Senior Vice President.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's forecasts Country Garden's attributable contracted sales will fall by around 25% to about RMB420 billion in 2022 because of weak conditions in China's property market. The company's attributed contracted sales decreased 37% during the first four months to RMB121.9 billion because of the tough operating conditions and Covid-led disruptions during the period.
Country Garden's profit margin is also likely to contract further, as the company could offer price discounts to support its contracted sales. Moody's projects the company's gross margin will fall to 15%-16% over the next 12-18 months from 18% in 2021.
As a result, Moody's expects Country Garden's EBIT/interest coverage to decrease to around 4.3x over the next 12 -18 months from 4.7x in 2021, as the company scales down its operations and its profit margin contracts further amid difficult operating conditions. This projected financial profile is weak for the company's Baa3 rating.
While the government's loosening of control measures could help stabilize the property market later this year, the company's high exposure to low-tier cities could increase sales volatility in a down market, given the weaker economic fundamentals of low-tier cities.
Meanwhile, Country Garden's access to the offshore bond market will remain restricted. This would limit its financial flexibility given that the offshore bond market accounted for around 25% of its total debt as of December 2021.
Moody's notes that Country Garden has recently issued a RMB500 million onshore bond with a coupon of 4.5% and a put option at the end of the first year after issuance. However, the scale of such issuance is small and the company's ability to consistently issue long-term debt through this market remain untested.
Moody's expects Country Garden's unrestricted cash of RMB147 billion as of December 2021 and operating cash flow will be sufficient to cover its maturing debt over the next 12-18 months, including two offshore senior notes totaling $1.3 billion (approximately RMB8.5 billion) and various onshore bonds totaling RMB24.8 billion that would become due or puttable by the end of September 2023.
However, the use of internal resources to repay maturing debt will narrow the company's liquidity buffer, if it is unable to issue new debt to refinance the majority of its maturing debt. Moody's also notes that part of the company's unrestricted cash would have to be kept at the project level to support its operations, which would limit the company's financial flexibility to use internal cash for servicing debt at the holding company level. These developments position the company weakly at the current Baa3 rating.
Moody's will review Country Garden's ability to (1) strengthen its funding access on a sustained basis; (2) maintain a strong liquidity buffer, and improve its operating and financial profiles through the property market downcycle; and (3) if there is any change in the subordination risks of its senior unsecured creditors as the company scales down its operations, which could diminish the benefit of credit diversification.
Moody's could confirm Country Garden's ratings if the company demonstrates a strong ability to improve its funding access, financial metrics and sales in the near term.
Credit metrics supportive of its existing rating include revenue/adjusted debt above 120%-125%, and EBIT/interest trending towards 4.5x, all on a sustained basis.
However, the ratings could be downgraded if Moody's assesses that the company's funding access, contracted sales and financial metrics are unlikely to improve in the near term. Credit metrics that could lead to a downgrade include its revenue/adjusted debt dropping below 95%-100% or if its EBIT/interest is unlikely to trend towards 4.5x.
Moody's could also downgrade the senior unsecured rating if subordination risks heighten because of the company's diminishing scale and credit diversification.
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.
Country Garden Holdings Company Limited (Country Garden), founded in 1992 and listed on the Hong Kong Stock Exchange, is a leading Chinese integrated property developer. As of the end of 2021, the company had an attributable land bank with a gross floor area of 253.1 million square meters spanning across 1,425 cities in China.
REGULATORY DISCLOSURES
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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.
YuYing (Celine) Yang
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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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.
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