Rating Action: Moody's assigns Ba2 to Greenland Holding's MTN drawdown
Global Credit Research - 15 Jul 2020
Hong Kong, July 15, 2020 -- Moody's Investors Service has assigned a Ba2 rating to the proposed senior unsecured USD notes to be issued by Greenland Global Investment Limited.
The notes will be issued under Greenland Global's medium-term note (MTN) program ((P)Ba2), which is unconditionally and irrevocably guaranteed by Greenland Holding Group Company Limited (Ba1 stable).
The outlook on the rating is stable.
Greenland Holding will primarily use the proceeds from the issuance to refinance its existing debt.
RATINGS RATIONALE
"The proposed notes will lengthen Greenland Holding's debt maturity profile without materially impacting its credit metrics, because the proceeds will mainly be used to refinance its existing debt," says Danny Chan, a Moody's Assistant Vice President and Analyst, who is also the Lead Analyst for Greenland Holding.
Moody's expects Greenland Holding's revenue/adjusted debt will weaken to around 131% in 2020 from 137% in 2019, as construction suspensions and delays caused by the coronavirus outbreak adversely affect the revenue growth of its property development and construction businesses. Its revenue/debt will likely recover to 143% in 2021, supported by an expected rebound in revenue from these businesses and slowing debt growth.
At the same time, Moody's expects Greenland Holding's EBIT/interest coverage will decline to 2.7x-2.8x over the next 12-18 months from 3.3x in 2019, mainly because of higher interest expenses as well as weakening profit margins due to increasing revenue contribution from its low-margin construction business.
The company's contracted sales fell 27% to RMB50.5 billion in the first quarter of 2020 compared with the same period last year, as disruptions caused by the coronavirus outbreak weakened sales. Moody's expects contracted sales to remain stable at RMB380 billion-RMB400 billion over the next 12-18 months compared with RMB388 billion in 2019, supported by Greenland Holding's sizable land bank and strong sales execution.
Greenland Holding's Ba1 corporate family rating (CFR) reflects its: (1) large-scale and nationwide coverage, as well as wide range of products in the property business across different tier cities in China (A1 stable); (2) fast-growing construction business driven by acquisitions and organic growth; and (3) access to funding because of its local state-owned enterprise (SOE) background.
On the other hand, Greenland Holding's rating is constrained by its weak interest coverage and the execution risks associated with its fast-growing construction business.
The company's liquidity is adequate, despite its cash holdings covering only 72% of its short-term debt as of March 2020. Moody's expects the company's cash holdings, together with cash flow generated from operating activities, will be sufficient to cover its maturing debt (including onshore puttable bonds) and committed land payments over the next 12-18 months.
The company has a good history of accessing different funding channels to support its debt refinancing and high funding needs because of its ownership by the Shanghai municipal government. Moreover, the proposed notes, together with the USD500 million notes issued in June 2020, will help improve its liquidity.
The Ba2 rating on the proposed notes reflects the risk of structural subordination, given that the majority of claims are at the operating subsidiaries and will be prioritized over claims at the holding company in the event of a bankruptcy. In addition, there are few mitigating factors for structural subordination at the holding company, reducing the likely recovery rate for claims at the holding company level.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that the company will continue to control its debt growth and pace of land acquisitions while growing its scale over the next 12-18 months.
Moody's could upgrade the rating if the company (1) sustains its leading position in China's residential market; (2) maintains prudent practices in its land acquisition and financial management; and (3) improves its credit metrics, such that its revenue/debt remains above 140% and EBIT/interest remains above 3.5x on a sustained basis.
On the other hand, Moody's could downgrade the rating if the company experiences (1) weak sales performance or weak collections on its sales proceeds; (2) a decline in its profit margin; (3) a sizable increase in debt, arising from aggressive expansion or land acquisitions; or (4) an increase in the risk profile of its non-property businesses.
Moody's would also consider downgrading the rating if the company's credit metrics weaken, such that its revenue/adjusted debt falls below 100% and adjusted EBIT/interest declines to 2.0x-2.5x on a sustained basis.
A significant reduction in the Shanghai government's ownership of Greenland Holding, which would hurt the company's access to funding, could also bring about a downgrade.
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.
Headquartered in Shanghai, Greenland Holding Group Company Limited is a state-controlled enterprise that primarily focuses on the real estate sector, with dealings in construction, finance and auto dealerships as well. The Shanghai State-owned Assets Supervision and Administration Commission is effectively the largest shareholder of Greenland Holding.
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.
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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.
Danny Chan 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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