March 24, 2017 / 2:09 AM / 10 months ago

Fitch Assigns Evergrande's Proposed USD Notes 'B-(EXP)' Rating

(The following statement was released by the rating agency) HONG KONG, March 23 (Fitch) Fitch Ratings has assigned China Evergrande Group's (B+/Negative) proposed US dollar senior notes a 'B-(EXP)' expected rating, with a Recovery Rating of 'RR6'. The proposed notes are rated at the same level as Evergrande's senior unsecured rating because they constitute its direct and senior unsecured obligations. The use of proceeds is for refinancing. The final rating is subject to the receipt of final documentation conforming to information already received. KEY RATING DRIVERS Higher Leverage to Continue: Fitch expects Evergrande's net debt to continue rising but at a slower pace in 2H16 than the 39% increase in 1H16. This may have pushed up its leverage - measured by net debt-to-adjusted inventory - to above 60% by end-2016, from 53% at end-2015 and 59.6% in 1H16. Sustained leverage of above 60% may result in rating downgrades following our review of its 2016 results which will be announced by end-March 2017. Evergrande's high leverage should be partially eased after it receives the full proceeds from its CNY30 billion equity-raising for its onshore subsidiary from new investors in 2017, as well as its ongoing restructuring in the capital market. A major increase in its adjusted inventory level in 2H16 from 1H16 may offset the impact of its rising net debt and moderate its leverage increase. The company added debt mainly to finance an increase in land acquisitions and high property-development costs in 2H16, as well as its CNY36.3 billion investment in China Vanke Co., Ltd. (BBB+/Stable). Gross floor area (GFA) acquired in 1H16 was 2.6x of the GFA sold and the company has almost 380 projects under construction. The land-acquisition pace did not slow substantially in 2H16, although Evergrande has enough land bank to support its growth. Strong Contracted Sales Momentum: Evergrande's business profile is supported by its large scale and ongoing geographic diversification into tier 1 and 2 cities. The company's contracted sales almost doubled to CNY373 billion in 2016 from a year earlier. This makes it the largest homebuilder in China. The sales momentum continued in January 2017; contracted sales rose by 75.2% yoy to CNY37.2 billion even amidst the current policy headwinds. Evergrande has a strong cash-collection ratio of around 80% and the increased contracted sales provide liquidity to fuel Evergrande's aggressive expansion. Margin under Pressure: The company's high leverage requires high turnover, which limits its profit margin. Besides, a large portion of Evergrande's land was acquired in the last few years, after land prices had increased in major cities, which would mean higher land costs for projects it sells in the future. Evergrande has a large sales team that runs frequent marketing campaigns to support its sales growth nationwide. As a result, selling, general and administrative costs were high at over 10% of total revenue in 2011-2015 and 13.4% of total revenue in 1H16. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales continue to rise in 2017, with a mild increase in average selling prices - Land purchases to slow in 2017, but the company to undertake enough land purchases to support future sales - Higher unit land costs in 2017 and 2018, as the land bank acquired in the last few years was more expensive - Development pace remaining high in 2017 - Margin under pressure, as the highly leveraged business requires a fast churn that undermines profitability. RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: - Net debt/adjusted inventory sustained above 60% - Total payables/gross inventory sustained above 0.50x (2015: 0.46x) - Tighter liquidity position due to weaker access to financing channels. Positive: The current rating is on Negative Outlook. Fitch does not anticipate developments with a significant likelihood, individually or collectively, of leading to a rating upgrade. However, the Outlook may revert to Stable if the negative factors above do not materialise. Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19F, Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Winnie Guo Associate Director + 852 2263 9969 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Date of Relevant Rating Committee: 25 April 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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