Rating Action: Moody's assigns B2 to Powerlong Real Estate's proposed USD notes
Global Credit Research - 03 Aug 2020
Hong Kong, August 03, 2020 -- Moody's Investors Service, ("Moody's") has assigned a B2 rating to Powerlong Real Estate Holdings Limited's (B1 stable) proposed senior unsecured USD notes.
Powerlong plans to use the proceeds from the proposed notes to refinance its offshore indebtedness.
RATINGS RATIONALE
"Powerlong's B1 corporate family rating (CFR) reflects its (1) track record of developing and selling commercial and residential properties; (2) growing recurring revenue, which improves the stability of its debt servicing; and (3) expansion into cities with strong economic fundamentals where demand for its properties is more favorable," says Cedric Lai, a Moody's Vice President and Senior Analyst.
"However, the company's credit profile is constrained by execution risk, the high level of capital required for its business strategy, and its moderate debt leverage," adds Lai.
The proposed issuance will improve Powerlong's liquidity profile and will not materially affect its credit metrics, because the company will use the proceeds to refinance existing debt.
Moody's expects Powerlong's adjusted EBIT/interest and adjusted debt/adjusted capitalization will remain largely stable at around 2.7x-2.8x and 55%-56%, respectively, over the next 12-18 months, underpinned by increased revenue booking from strong contracted sales over the past two years.
Meanwhile, Moody's expects the company's adjusted rental income/interest coverage will slightly weaken to around 37% over the next 12-18 months from 39% in 2019, since interest expense growth will slightly outpace rental income growth over this period.
Powerlong's total contracted sales grew 8.0% to RMB31.5 billion in the first six months of 2020 compared with last year. Moody's expects its contracted sales will slightly increase in 2020 when compared with 2019, supported by good sales execution abilities, its focus on the economically strong Yangtze River Delta region, which can in turn support a more robust housing demand.
The B2 senior unsecured debt rating is one notch lower than the corporate family rating due to structural subordination risk. This risk reflects the fact that the majority of claims are at the operating subsidiaries and have priority over Powerlong's senior unsecured claims in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the likely recovery rate for claims at the holding company will be lower.
Powerlong's liquidity is adequate. Its cash holdings of RMB18.5 billion as of 31 December 2019 cover its short-term debt of RMB15.3 billion. Moody's expects the company's cash holdings, together with expected operating cash inflow, will be able to cover its committed land purchases, dividend payments, as well as capital spending and payables for its previous acquisitions, over the next 12-18 months.
In terms of environmental, social and governance (ESG) factors, Moody's has considered the company's concentrated ownership in its controlling shareholder, Hoi Kin Hong and Hoi Wa Fong, who held a 59% stake in the company as of 31 December 2019.
Moody's has also considered (1) the fact that independent directors chair the audit and remuneration committees; (2) the low level of related-party transactions and dividend payouts; (3) the presence of other internal governance structures and standards as required by the Hong Kong Exchange.
Moody's regards the impact of the deteriorating global economic outlook amid the rapid and widening spread of the coronavirus outbreak as a social risk under our ESG framework because of the substantial implications for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable ratings outlook reflects Moody's expectation that Powerlong will (1) maintain growth in its contracted sales, especially of commercial properties; (2) ramp up its malls to generate streams of rental revenue that will improve coverage on interest expenses over the next 12-18 months; and (3) maintain adequate liquidity and exercise prudence in land acquisitions.
Upward ratings pressure could emerge if Powerlong continues to grow in scale while maintaining its adequate liquidity and sound credit metrics, and improves its debt leverage to a level that matches its business model of holding investment properties. Credit metrics that could trigger a ratings upgrade include: (1) adjusted EBIT/interest rising above 3.0x; (2) rental income/interest coverage rising above 0.5x; (3) adjusted debt/adjusted total capitalization falling below 50%-53% on a sustained basis.
Moody's could downgrade Powerlong's ratings if the company's sales weaken or if it pursues a more aggressive expansion strategy that weakens its credit metrics. Credit metrics that could trigger a ratings downgrade include: (1) adjusted EBIT/interest falling below 2.0x; (2) rental income/interest dropping below 0.3x; (3) adjusted debt/adjusted total capitalization rising above 55%-58.
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.
Powerlong Real Estate Holdings Limited is a Chinese property developer focused on building large-scale integrated residential and commercial properties in China. The company listed on the Hong Kong Exchange in October 2009. The founding Hoi family held a 59% stake in the company at 31 December 2019.
At 31 December 2019, Powerlong's land bank for development totaled around 29.7 million square meters in gross floor area under development and for future development.
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.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, 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 credit ratings from the support provider's credit rating. 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 structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
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 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
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