November 1, 2017 / 10:13 AM / a year ago

Fitch Affirms Sunac at 'BB-/Negative', Downgrades Notes

(The following statement was released by the rating agency) HONG KONG, November 01 (Fitch) Fitch Ratings has affirmed Sunac China Holdings Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a Negative Outlook. At the same time, Fitch has downgraded Sunac's senior unsecured rating and the ratings of its outstanding US dollar notes to 'B+' from 'BB-'. The Rating Watch Negative (RWN) on all the ratings, in place since July 2017, has been resolved. Sunac's ratings have been removed from RWN following the confirmation of the final payment of CNY14.2 billion for its 91% stake in 13 Wanda City projects, which was scheduled to be made on 17 October 2017, with Fitch expecting the title transfer for the remaining five Wanda City projects to Sunac to be completed soon. Sunac's IDR affirmation reflects Fitch's expectation for leverage will stay above 50% in 2017, but possibly fall below this level in 2018. Sunac's management has publicly committed to deleveraging and there is no pressure for Sunac to continue aggressive land banking, considering its ample land bank of over 100 million square metres (sq m) of gross floor area (GFA) that allows for over five years of development. Sunac has not made any large land acquisitions since the Wanda City acquisition. However, the still-high leverage warrants keeping Sunac on Negative Outlook. The downgrade of Sunac's senior unsecured rating and the ratings on its outstanding US dollar notes reflects the subordination of Sunac's offshore bonds to its onshore debt. Prior-ranking onshore debt increased to 92.6% of total debt at end-1H17, from 54.4% in 2015. Fitch estimates the liquidation value is short of the company's CNY191 billion in total debt. The outstanding US dollar notes, which we consider to be the lowest-ranking debt, are too far down in priority to receive any significant payment during liquidation. Fitch's liquidation value analysis deducts customer deposits from inventory and takes into account the Wanda project acquisition at the acquired value, although the impact on the liquidation value may differ based on the entities' financial statements. Final financial statements for the full year 2017 are not likely to alter the recovery analysis result. KEY RATING DRIVERS Wanda City Completion on Target: Sunac's acquisition of 13 Wanda City projects from Dalian Wanda Commercial Property Co. Ltd. (BBB/RWN) has been completed, with Sunac confirming that full payment had been made and the transfer of the remaining five Wanda City projects is near completion. The acquisition has significantly increased Sunac's attributable land bank to over 100 million sq m, from 68 million sq m at end-1H17. The additional land parcels were acquired at a low cost, but we believe the required capex commitment will affect Sunac's financial profile. Sunac will provide shareholders with details about the Wanda City projects towards year-end. Still High Leverage: Sunac's leverage was 63.4% before the Wanda City project acquisition and we expect it to remain above 50% for the remainder of 2017, despite the company cutting back on land acquisitions in 2H17. Sunac has sufficient land bank to slow its land acquisition and leverage may fall below 50% in 2018 if management sticks to its announced commitment to deleverage. We believe this is possible as Sunac has over five years of land bank and will therefore not be in a hurry to replenish its land bank. The still-high leverage warrants keeping Sunac on Negative Outlook. Greater Geographical Diversification: Sunac's geographical diversification has improved, with concentration in the Pan Bohai Rim, Yangtze River Delta and Chengdu/Chongqing regions dropping to 66% in 1H17, from 95% in 2015. Concentration will fall further following the Wanda City acquisition, as only five of the 13 projects are located in these markets, namely the projects in Hefei, Wuxi, Ji'nan, Chengdu and Chongqing. Geographical diversification is increasingly important, as each local government is implementing restrictive home-purchase policies differently and more geographically concentrated homebuilders, who lack the flexibility provided by having a number of cities located in areas with lower restrictions, are experiencing greater difficulty in generating consistent sales growth. Strong Contracted Sales: Sunac reported contracted sales of CNY43 billion in September 2017, which is comparable with the contracted sales of the top-three largest Chinese homebuilders; China Vanke Co., Ltd. (BBB+/Stable), Country Garden Holdings Co. Ltd. (BBB-/Stable) and China Evergrande Group (B+/Stable). The contracted sales do not include the majority of Sunac's newly acquired Wanda City projects, as most have only recently been transferred with another five projects still awaiting transfer. The continued fall in Sunac's average selling price against higher sales value suggests the company has the flexibility to generate sales from a greater geographical and product spread, making it more likely for Sunac to improve operational cash flow for deleveraging. Consent Solicitation Neutral to Ratings: Sunac announced on 1 November 2017 that it is soliciting bondholder consent to align the terms of its 8.75% USD400 million bond due 2019 with its newly issued 7.95% USD600 million bond due 2022. This would provide more flexibility in its business, investments in joint ventures and minority-owned entities and asset sales. Fitch does not expect to change its view on Sunac solely due to the adoption of the proposed amendments. DERIVATION SUMMARY Sunac's homebuilding business scale, geographical diversification, project execution record and churn rate are comparable with 'BBB-' rated homebuilders, such as Country Garden, and comparable with or superior to 'BB' rated homebuilders, such as Beijing Capital Development Holding (Group) Co., Ltd. (BBB-/Negative, standalone: BB/Negative) and Guangzhou R&F Properties Co. Ltd. (BB/RWN). However, Sunac has a more volatile financial profile than these peers and is more comparable with lower-rated issuers, such as Greenland Holding Group Company Limited (BB/Negative, standalone BB-/Negative) and China Evergrande, even though its 2016 leverage is lower than for these two peers. No Country Ceiling, parent/subsidiary or operating environment aspects affect the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Minimal land acquisition in 2H17 other than the 13 Wanda City projects - Replenishment land bank at the rate of 1.1x attributable contracted sales GFA to maintain land bank life of five years - Consolidated revenue at 60%-70% of attributable sales between 2017 and 2019 - Capex of CNY3 billion a year, mainly for Wanda City projects - Contracted GFA to expand at 30% in 2018 and 10% in 2019 - Average selling prices to stay below the current level of CNY17,740 per sq m between 2017 and 2019 RATING SENSITIVITIES The current rating is on Negative Outlook. Fitch does not anticipate developments that would lead to a rating upgrade. However, developments that may lead to the Outlook being changed to Stable include: - net debt/adjusted inventory sustained below 50% (1H17: 63%) - attributable contracted sales/adjusted inventory sustained above 0.8x (1H17: 0.7x) - EBITDA margin, excluding the effect of revaluation of acquisitions, sustained above 18% (1H17:27%) Developments that May, Individually or Collectively, Lead to Negative Rating Action - net debt/adjusted inventory above 50% for a sustained period - attributable contracted sales/adjusted inventory below 0.8x for a sustained period - EBITDA margin, excluding the effect of revaluation of acquisitions, below 18% for a sustained period (1H17:26.7%) LIQUIDITY Sufficient Liquidity: Fitch expects Sunac to maintain sufficient liquidity for its operation and debt repayment, as contracted sales are likely to show strong triple-digit growth in 4Q17 to reach more than CNY100 billion. Fitch expects the Sunac's cash at 2017 year end will be higher than the CNY70.7 billion available cash at end-1H17 (excluding restricted cash) FULL LIST OF RATING ACTIONS Sunac China Holdings Limited -- Long-Term Foreign-Currency IDR affirmed at 'BB-'; Outlook Negative and Rating Watch Negative Resolved -- Senior unsecured rating downgraded to 'B+' from 'BB-'; Rating Watch Negative Resolved -- USD400 million 6.875% senior notes due 2020 downgraded to 'B+' from 'BB-'; Rating Watch Negative Resolved -- USD400 million 8.75% senior notes due 2019 downgraded to 'B+' from 'BB-'; Rating Watch Negative Resolved -- UDS600 million 7.95% senior notes due 2022 downgraded to 'B+' from 'BB-'; Rating Watch Negative Resolved Contact: Primary Analyst Su Aik Lim Senior Director +852 2263 9914 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Summary of Financial Statement Adjustments - Payable for project acquisitions deducted from inventory - Valuation gains arising from acquisition of subsidiaries added back to gross profit - Capitalised interest in cost of sales added back to gross profit - Onshore perpetual bonds treated as 100% debt Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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