Rating Action: Moody's assigns B1 to Yuzhou's proposed USD notes
Global Credit Research - 05 Aug 2020
Hong Kong, August 05, 2020 -- Moody's Investors Service has assigned a B1 rating to Yuzhou Group Holdings Company Limited's (Ba3 stable) proposed senior unsecured USD notes.
Yuzhou plans to use the proceeds from the proposed notes to refinance its medium to long-term offshore debt.
RATINGS RATIONALE
"Yuzhou's Ba3 corporate family rating (CFR) reflects its (1) track record of developing and selling residential properties in the Yangtze River Delta, Bohai Rim and West Strait area; (2) growing operating scale and improved geographic diversification; and (3) good liquidity," says Celine Yang, a Moody's Assistant Vice President and Analyst.
"However, the company's credit profile is constrained by its weak credit metrics and high reliance on sales from joint ventures (JVs) and associates," adds Yang.
The proposed issuance will improve Yuzhou'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 Yuzhou's revenue, financial metrics and visibility will improve as it increasingly consolidates joint ventures or associated projects in the coming 12-18 months. Specifically, the company's leverage, as measured by revenue/adjusted debt, will improve to 50%-60% over the next 12-18 months from the weak level of 33.8% recorded in 2019. At the same time, its interest coverage, as measured by adjusted EBIT/interest, will gradually improve to 2.5x from 2.0x during the same period.
Yuzhou's gross contracted sales grew robustly at 56.0% to RMB53.9 billion in the first seven months of 2020 compared with the same period last year, despite coronavirus-related disruptions. Moody's expects its contracted sales to increase by around 25%-30% to reach over RMB95 billion in 2020 from RMB 75.1 billion in 2019. The expected strong cash collection from property sales will help Yuzhou fund its capital expenditure.
Yuzhou's B1 senior unsecured bond rating is one notch below its CFR because of the risk of structural subordination. This subordination risk reflects the fact that the majority of claims are at the operating subsidiaries and have priority over claims at the holding company 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.
Yuzhou's liquidity is good. The company's cash-on-hand of RMB35.5 billion as of 31 December 2019 covered around 233% of its short-term debt of RMB15.3 billion. Moody's expects its cash holdings and operating cash flow will be sufficient to cover its maturing debt, committed land premiums and dividend payments in the next 12-18 months.
Moody's expects that Yuzhou's sustained good liquidity buffer will mitigate the risk of high debt leverage in the near term.
In terms of environmental, social and governance (ESG) factors, Moody's has considered the company's concentrated ownership by its controlling shareholder, Mr. Lam Lung On, who held a 57.38% stake in the company at 31 December 2019, and Yuzhou's relatively high dividend payout ratio of 46.8% in 2019, compared to 35.0%-36.5% in the previous four years.
Moody's has also considered the presence of internal governance structures and disclosure standards, as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange. The company has three special committees; the Audit Committee, the Remuneration Committee and the Nomination Committee, which are all chaired by independent non-executive directors.
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 its environmental, social and governance (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 outlook reflects Moody's expectation that Yuzhou will execute its business plan and maintain good liquidity while improving its credit metrics over the next 12-18 months.
Yuzhou's ratings could be upgraded if it (1) maintains good liquidity, (2) executes its contracted sales growth target while maintaining stable margins, and (3) improves its credit metrics, with revenue/adjusted debt trending to 70%-75% and EBIT/interest coverage exceeding 3.0x-3.5x on a sustained basis.
A material reduction in contingent liabilities associated with joint ventures or lower risk of providing funding support to joint ventures could also be positive for the ratings. This could be a result of reduced usage of joint ventures (JVs) or a material improvement in the financial strengths of its JV projects.
Moody's could downgrade the ratings if Yuzhou's contracted sales growth, liquidity, profit margins or credit metrics weaken. Credit metrics indicative of a downgrade include (1) cash/short-term debt below 1.5x, (2) EBIT interest coverage below 2.0-2.5x, and (3) revenue/adjusted debt failing to trend back to 50%-60% on a sustained basis.
Moody's could also downgrade the ratings if the company's contingent liabilities associated with JVs or the risk of providing funding support to JVs increases materially. This could be a result of a material deterioration in the financial strengths and liquidity of its JV projects or a substantial increase in investment in new JV projects.
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.
Yuzhou Group Holdings Company Limited is a property developer that focuses on residential housing in the Yangtze River Delta and the West Strait Economic Zone. Yuzhou listed its shares on the Hong Kong Stock Exchange in 2009. At 31 December 2019, Yuzhou's land bank totaled 20.12 million square meters in saleable gross floor area.
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.
YuYing (Celine) Yang Asst Vice President - 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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