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Rating Action: Moody's assigns Baa3 rating to Country Garden's proposed USD notes
Global Credit Research - 05 Jan 2021
Hong Kong, January 05, 2021 -- Moody's Investors Service has assigned a Baa3 senior unsecured rating to the proposed USD notes to be issued by Country Garden Holdings Company Limited (Country Garden, Baa3 stable).
Country Garden plans to use the proceeds from the proposed notes to refinance its existing medium to long-term offshore debt, which will mature within one year.
RATINGS RATIONALE
"Country Garden's Baa3 issuer rating reflects the company's strong brand name, good geographic diversification, strong liquidity, solid track record of resilient operations through the cycles as well as sufficient land bank, which can support its business growth over the next 3-4 years," says Celine Yang, a Moody's Assistant Vice President and Analyst.
"On the other hand, the company's rating is constrained by its low profit margin and large exposure to lower-tier cities where demand can be volatile," adds Yang.
The proposed issuance will not materially affect Country Garden's credit metrics because the company will use the proceeds to refinance existing debt.
Moody's expects Country Garden's debt leverage, as measured by revenue/adjusted debt, will remain strong at 110%-115% in the next 12-18 months, as compared with 114% for the 12 months ended June 2020.
Additionally, Moody's expects Country Garden's EBIT/interest coverage will improve slightly to 4.5x-4.7x in the next 12-18 months from 4.4x for the 12 months ended June 2020, driven by higher revenue recognition and declining interest costs.
Country Garden grew its attributable contracted sales by about 3.4% to RMB557.8 billion for the first 11 months of 2020 compared with the same period a year ago, despite the disruption caused by the coronavirus pandemic in H1 2020. Moody's expects the company's sales to maintain mild annual growth of 5%-10% in 2021, supported by the recovery of China's economic growth and housing demand as the impact of the pandemic fades.
Country Garden's senior unsecured rating is unaffected by subordination to claims at the operating company level. Moody's explains that despite Country Garden's status as a holding company -- with most claims at the operating subsidiary level -- Country Garden's creditors benefit from the group's diversified business profile, with cash flow generation across a large number of operating subsidiaries with high geographic diversification. Such business diversification mitigates the structural subordination risk.
Country Garden's liquidity is excellent. Moody's expects the company's cash holdings, along with its operating cash flow, will cover its short-term debt and committed land payments over the next 12-18 months. The company's cash-to-short-term-debt ratio remained strong at 1.9x as of 30 June 2020, compared with 2.3x at 31 December 2019.
In terms of environmental, social and governance (ESG) factors, Moody's has considered the risks associated with the company's concentrated ownership, given that its key shareholder, Ms. Yang Huiyan, held a 57.6% stake in the company as of 30 June 2020. This risk is partly mitigated by the presence of five independent non-executive directors on the company's 13-member board of directors, and the presence of other internal governance structures and standards as required under the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange. In addition, its related-party transactions have been low relative to its sales, staying at around 3%, and dividend payouts have been moderate, remaining below 40% over the last five years.
Moody's also 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 RATINGS
The stable outlook reflects Country Garden's good liquidity, underpinned by its strong operating cash flow and good access to both the onshore and offshore capital markets.
Moody's could upgrade Country Garden's ratings if it maintains its strong operating profile as well as disciplined liquidity and financial management, and demonstrates the sustainability of its business model with a high level of business and financial stability.
Credit metrics indicative of an upgrade include (1) revenue/adjusted debt above 120%-125%, (2) EBIT/interest over 6.5x-7.0x, and (3) strong liquidity, with its cash/short-term debt above 1.5x, all on a sustained basis.
However, Moody's could downgrade the ratings if (1) the company's sales deteriorate significantly; (2) its liquidity weakens; or (3) it undertakes aggressive debt-funded expansion that weakens its credit metrics, such that revenue/adjusted debt drops below 95%-100% and EBIT/interest falls below 4.5x-5x.
The principal methodology used in these ratings 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.
Country Garden Holdings Company Limited, founded in 1992 and listed on the Hong Kong Stock Exchange, is a leading Chinese integrated property developer. As of the end of June 2020, the company's land bank by attributable gross floor area (GFA) in China, including those of its joint ventures (JVs) and associates, was 172 million square meters (sqm). Its revenue was RMB185 billion ($26 billion) in H1 2020.
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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are 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.
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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