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Rating Action: Moody's assigns B3 rating to Modern Land's proposed USD notes
Global Credit Research - 05 Jan 2021
Hong Kong, January 05, 2021 -- Moody's Investors Service has assigned a B3 senior unsecured rating to the proposed USD notes to be issued by Modern Land (China) Co., Limited (Modern Land, B2 stable).
Modern Land plans to use the proceeds from the proposed notes to refinance its existing offshore debt.
RATINGS RATIONALE
"Modern Land's B2 corporate family rating (CFR) reflects the company's niche in marketing and selling comfortable and eco-friendly homes, demonstrated sales execution ability and adequate liquidity," says Celine Yang, a Moody's Assistant Vice President and Analyst.
"Meanwhile, its rating is constrained by the company's improving but still-low gross profit margin and modest financial metrics due to its debt-funded growth and high finance costs," adds Yang.
The proposed bond issuance will lengthen Modern Land's debt maturity profile and improve its liquidity without having a material impact on the company's credit profile, because it will use the proceeds to refinance maturing debt.
Moody's expects Modern Land's debt leverage, as measured by revenue/adjusted debt, will fall slightly to 60%-70% in the next 12-18 months from 75% for the 12 months ended June 2020 as debt growth likely outpaces revenue growth amid the company's debt-funded business expansion.
Similarly, Moody's forecasts Modern Land's EBIT interest coverage will edge down to 1.9x-2.0x from 2.2x over the same period as increasing interest expenses on the back of rising debt outpace EBIT growth.
Modern Land's total contracted sales grew about 16% to RMB36.96 billion for the first 11 months of 2020 compared with the same period a year ago, despite the disruption caused by coronavirus pandemic in H1 2020. Its sales growth outperformed the national average of 9.5% over the same period. Moody's forecasts the company will achieve mild sales growth of 5%-10% in 2021 compared to 2020, supported by its sizable saleable resources and track record of sales execution.
Modern Land's B3 senior unsecured debt rating is one notch lower than the company's B2 CFR due to structural subordination risk. The subordination risk refers to the fact that the majority of Modern Land's claims are at its operating subsidiaries and, in the event of a bankruptcy, they have priority over claims at the holding company. 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.
Modern Land's liquidity is adequate. Moody's expects the company's cash holdings and operating cash flow will be sufficient to cover its debt maturities and committed land premiums in the next 12-18 months.
In terms of environmental, social and governance (ESG) considerations, Moody's has considered the risks associated with Modern Land's concentrated ownership, given that its founder and chairperson, Zhang Lei, held an approximate 65.8% stake in the company as of the end of June 2020. This risk is mitigated by the company's established governance structures and standards as required by the relevant code for companies listed on the Hong Kong Stock Exchange. Furthermore, the company has three special committees in place -- an audit committee, a remuneration committee and a nomination committee -- two of which are chaired and dominated by independent non-executive directors.
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 RATING
The stable outlook reflects Moody's expectation that Modern Land will achieve stable sales growth while maintaining modest credit metrics and adequate liquidity over the next 12-18 months.
Moody's could upgrade Modern Land's ratings if the company (1) grows its scale and improves its profit margin; (2) maintains a reasonable cash balance, with cash/short-term debt above 1.5x; (3) maintains strong financial discipline in its land acquisitions, with EBIT/interest coverage above 2.5x-3.0x and revenue/adjusted debt above 70%-75%, both on a sustained basis; and (4) reduces its exposure to non-standard borrowings.
On the other hand, Moody's could downgrade Modern Land's ratings if (1) the company's liquidity and ability to generate operating cash flow decline beyond expectations because of falling contracted sales and aggressive land acquisitions; and (2) its revenue recognition is slower than expected, or its profit margin declines further, leading to further weakness in its EBIT/interest coverage and financial flexibility.
Specifically, Moody's could downgrade the ratings if (1) Modern Land's restricted and unrestricted cash balance fall below 100% of its short-term debt; or (2) the company's EBIT/interest coverage declines below 1.5x on a sustained basis.
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.
Modern Land (China) Co., Limited was founded in Beijing in 2000 by Mr. Zhang Lei, who is the company's current chairman. The company specializes in developing green housing units and is among the few early leaders in China's green and eco lifestyle market.
Modern Land was listed on the Hong Kong Stock Exchange in July 2013. As of June 2020, the company had a gross land bank of around 12.4 million square meters in terms of 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_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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