Country Garden Holdings Co says its downgrading to junk by a major credit agency will not impact its debt serviceability and funding capacity. In a separate announcement on Thursday, the company announced progress on the prepayment of an offshore bond as China’s biggest developer struggles to have an image of strength in a fragile industry.
Moody’s Investors Service downgraded Country Garden one notch to Ba1 on Wednesday and gave a negative rating outlook. The rating agency cited Country Garden’s “decline in property sales and deteriorating financial metrics” as well as “weaker access to long-term financing” as reasons for the downgrade.
The negative outlook reflects Country Garden’s “reduced liquidity buffer and financial flexibility,” said Kaven Tsang, group senior vice president of Corporate Finance at Moody’s Investors Service Hong Kong Ltd.
While the Guangzhou-based developer has so far avoided defaults and restructuring that have plagued rivals like China Evergrande, Country Garden saw contract sales fall 57% in April from a year earlier, with its May results down 50% from 2021.
Country Garden proclaims health
In response to the trash rundown, China’s biggest real estate developer by sales told China’s Securities Daily on Thursday that it sees the credit agency moving ahead due to an industry-wide slowdown, noting “a slower-than-expected pace of improvement in industry sales performance and financial environment.”
“The company is in stable operational and financial conditions. At the same time, as one of the first Chinese private real estate enterprises authorized to issue corporate bonds with credit protection mechanisms, the company successfully issued a 500 million RMB corporate bond on May 20,” a Country Garden spokesperson told the official newspaper.
Separately, in a filing with the Hong Kong stock exchange on Thursday, Country Garden said it was moving forward with a voluntary early buy-back offer for a set of offshore bonds in a move analysts consider as flexing its financial muscles after the developer’s stock has plummeted more than 35% on the Hong Kong stock exchange in the past six months.
Investors holding 60.1% of the US dollar senior notes agreed to the early redemption, meaning Country Garden redeemed $411 million of principal. The company will also pay corresponding interest in the amount of $19.7 per $1,000 principal amount of the note. The note has a coupon rate of 4.75% and will mature on July 25.
Country Garden paid investors cash for the tickets on Friday and they will be canceled accordingly, the developer said in a statement posted on its official WeChat account on Thursday.
“The fact that the remaining investors chose to hold the notes until maturity demonstrates their confidence in the company’s debt repayment ability,” he said in the WeChat statement.
Join the crowd
Often referred to as a “model student” in China’s real estate sector, Country Garden is one of the few major private sector developers in the country that has yet to default, avoiding the fate of rivals Evergrande, Sunac China and Guangzhou R&F. .
The company became the top Chinese developer to contract sales in 2021, despite a lackluster performance, after a second-half dip knocked China Evergrande off the lead. From January to May this year, however, Country Garden’s contract sales fell nearly 40% to just RMB 150.6 billion amid tough economic conditions and the impact of Covid restrictions.
“While the government has eased some restrictions in the property market, Country Garden’s high exposure to lower-tier cities could expose it to sales volatility and pressure on profit margins, given the weakened economic fundamentals there. -low,” Moody’s analysts said in their note.
Moody’s predicts a 30% decline in contract sales at Country Garden this year. He also expects the developer’s gross margin to fall to 15% to 16% over the next 12 to 18 months, from 18% in 2021, as falling house prices squeeze profits.
After July’s senior bond redemption, Country Garden will have only one offshore bond maturing at the end of 2023, Moody’s said. The agency considers Country Garden’s unrestricted liquidity to be RMB 147 billion as of December 2021 and that projected operating cash flow will be sufficient to cover its maturing debt that would become due or repayable by the end of 2023.
Nonetheless, Country Garden’s access to the offshore bond market will remain limited given weak market sentiment, Moody’s noted.
Country Garden has now received undesirable level ratings from two major credit agencies. S&P Global Ratings, which hasn’t judged the developer’s investment quality since 2008, reaffirmed it at BB+, the best in junk territory, in April and revised the outlook to positive from stable.
Fitch Ratings upgraded Country Garden to investment grade in 2017, but put the company on watch for a downgrade to junk in June.
Moody’s upgraded Country Garden to investment grade territory in September 2020, but downgraded its rating outlook to negative in March due to expectations of lower profit margins and property sales in 2023 as well as weakened access to offshore financing. . The company was indicted for demotion in May.