Rating Action: Moody's assigns Ba3 to CIFI's proposed USD notes
Global Credit Research - 05 Jan 2021
Hong Kong, January 05, 2021 -- Moody's Investors Service has assigned a Ba3 senior unsecured rating to the USD notes to be issued by CIFI Holdings (Group) Co. Ltd. (Ba2 stable).
CIFI plans to use the proceeds from the proposed notes to refinance existing debt.
RATINGS RATIONALE
"CIFI's Ba2 corporate family rating (CFR) reflects the company's ability to execute its property development strategy, which is focused on catering to housing demand from upgrade in key Tier 1 and Tier 2 cities. This focus helps the company achieve rapid asset turnover. The rating also takes into account the company's good liquidity, expanding scale and growing diversification," says Cedric Lai, a Moody's Vice President and Senior Analyst.
"However, CIFI's credit profile is constrained by moderate debt leverage and material exposure to its joint venture (JV) businesses, which hinders the transparency of its credit metrics, although this is mitigated by the good reputation of its JV partners," adds Lai.
The proposed issuance will improve CIFI's liquidity profile and not materially affect its credit metrics, because the company will use the proceeds to refinance existing debt.
Moody's expects CIFI's debt leverage -- as measured by revenue/adjusted debt, excluding adjustments for its joint-ventures and associates -- will improve to 65%-75% over the next 12-18 months, from 46% for the 12 months ended June 2020, driven by robust revenue recognition on the back of strong contracted sales over the past 2-3 years, as well as the company's disciplined approach to growth and controlling debt increase.
At the same time, Moody's expects CIFI's EBIT/interest, excluding adjustments for its joint-ventures and associates, will improve to 3.1x-3.6x from 2.5x over the same period, driven by higher earnings and declining interest costs.
CIFI's total contracted sales grew 12.5% to RMB200 billion for the first 11 months of 2020 compared with the same period last year. Moody's believes CIFI's sizable salable resources, strong sales execution and solid housing demand in the company's core markets will enable the company to further grow its contracted sales to RMB220-240 billion in 2021.
The Ba3 senior unsecured debt rating is one notch lower than the corporate family rating due to structural subordination risk. Majority of CIFI's claims are at its operating subsidiaries and have priority over claims at the holding company in a liquidation scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. Consequently, the expected recovery rate for claims at the holding company will be lower.
CIFI's liquidity position is good. The company's cash balance of RMB59.4 billion covered 2.3x of its short-term debt as of 30 June 2020. Moody's expects the company's cash holdings, together with expected operating cash inflow, will be able to cover its maturing short-term debt, 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 taken into account CIFI's concentrated ownership. Its controlling shareholders, Lin Zhong and his family members, collectively held a 54.32% stake in the company as of 30 June 2020. Moody's has also considered (1) the fact that the company's audit and remuneration committees comprise independent non-executive directors who maintain oversight of the company; and (2) the application of the Listing Rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance in Hong Kong to oversee related-party transactions.
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 ESG framework, given 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 CIFI will continue to adopt a disciplined financial management to achieve its business plan and maintain good liquidity over the next 12-18 months.
Moody's could upgrade CIFI's CFR if it successfully executes its sales plan through the cycles and maintains strong liquidity and prudent financial management practices. Specifically, Moody's could upgrade the rating if CIFI's (1) revenue/adjusted debt exceeds 80%; and (2) EBIT/interest coverage is above 4.0x-4.5x, both on a sustained basis.
A significant reduction in contingent liabilities associated with JVs or a lower likelihood of providing funding support to JVs could also be credit positive. This could be the result of reduced usage of JVs or a significant improvement in the financial strength of its JV projects.
On the other hand, Moody's could downgrade the rating if CIFI's (1) contracted sales deteriorates; (2) credit metrics weaken, with EBIT/interest coverage falling below 3.0x-3.5x or revenue/adjusted debt falling below 65% on a sustained basis; or (3) liquidity deteriorates, as reflected by cash/short-term debt falling below 1.25x.
Moody's could also downgrade the rating if the company's contingent liabilities associated with JVs or the likelihood of providing funding support to JVs increases significantly. This could be the result of a significant deterioration in the financial strength and liquidity of its JV projects or a substantial increase in investments 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.
CIFI Holdings (Group) Co. Ltd. (CIFI) was founded in 2000, incorporated in the Cayman Islands in May 2011 and listed on the Hong Kong Stock Exchange in November 2012. As of 30 June 2020, it was 54.32% owned by the Lin family.
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_1243406.
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.
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.
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.
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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 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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