June 28, 2017 / 8:48 AM / a year ago

Fitch Rates Evergrande's USD Notes Final 'B-'

(The following statement was released by the rating agency) HONG KONG, June 28 (Fitch) Fitch Ratings has assigned China Evergrande Group's (B+/Stable) USD598 million 6.25% senior notes due 2021, USD1.3 billion 7.5% senior notes due 2023 and USD4.7 billion 8.75% senior notes due 2025 a final 'B-' rating, with a Recovery Rating of 'RR6'. The proposed notes are rated at the same level as Evergrande's senior unsecured rating as they constitute direct and senior unsecured obligations. The proceeds will be used to refinance debt and general corporate purposes. The final rating is in line with the expected rating assigned on 21 June 2017. KEY RATING DRIVERS Improved Debt Structure: Evergrande's leverage and payables-to-gross inventory ratio has been improving further in 2017. This had been on an upward trend since 2010, but stabilised in 2016. The improvements came in as a result of its strong contracted sales growth, redemption of most perpetual debt in 1H17, and also receiving the full proceeds from its CNY70 billion equity-raising for its onshore subsidiary from new investors. Fitch will review its 1H17 result to assess the impact of the improvement. Stronger Land Bank Profile: Evergrande has shifted its sales away from lower-tier cities, reducing risks to sales and profitability. The company's land bank has swung sharply to Tier 1 and 2 cities, with these two categories making up 74.7% of its land bank by value and 57.9% by gross floor area at end-2016. Contracted sales from Tier 1 and 2 cities accounted for 67.4% of total sales in 2016, compared with 59% in 2015. Evergrande's average selling price (ASP) is still rising, and reached CNY10,269 per square metre (sq m) in May 2017 and CNY9,786 per sq m in the first five months in 2017 from CNY8,355 in 2016. Large Interest Burden: Evergrande's gross interest expense and distributions to holders of perpetual capital instruments in 2016 totalled CNY42.3 billion, a jump from CNY25.4 billion in 2015. Evergrande's gross interest expense exceeded capitalised interest for the first time. Interest expenses as a proportion of contracted sales improved to 11.3% from 12.5% in 2015, although the improvement is much smaller if an adjustment for Evergrande's cheaper funding cost in 2016 is included. We believe that Evergrande's high expenditure will continue to limit its operating cash flow generation and limit its ability to deleverage meaningfully. Shareholder-Friendly Moves Pressure Credit: Evergrande has bought back shares totalling HKD6.3 billion (CNY5.6 billion) since 29 March 2017, after its 2016 results announcement. Evergrande also plans to make a dividend payment of 50% of profit of 2016 and 1H17, only after it successfully lists its onshore property operation in China's A-share market, despite sustaining high negative FCF before dividend. This puts creditors at a disadvantage as the company is not building up a healthy buffer to improve its financial flexibility. DERIVATION SUMMARY Evergrande's business profile is more reflective of that of 'BB' category peers as Evergrande has a diversified geographical and product profile. This offsets its very aggressive financial profile, which is comparable with that of companies in the weak 'B' category. Its peers, like Country Garden Holdings Co. Ltd. (BB+/Stable), Greenland Holding Group Company Limited (BB+/Negative) and Sunac China Holdings Limited (BB/Negative), are similarly aggressive in expanding their scale and are among the 10 largest Chinese homebuilders. Country Garden's leverage of around 30% and churn rate of over 1.5x, is commensurate with a high 'BB' category profile and explains the multiple notch rating gap between it and Evergrande. Greenland's leverage is as high as that of Evergrande but Greenland has a large level of uncollected sales to mitigate its high leverage. Greenland, as a state-owned enterprise, has a stronger position in acquiring land at low costs, especially for new city districts that local governments are keen to develop. This enhances Greenland's business profile over that of Evergrande. Sunac's leverage is low at between 40%-50% and it does not have high payables risks, unlike Evergrande. Sunac's sales are also mostly in major cities and is reflected by its higher ASP of CNY20,480 per sq m, more than double that of Evergrande. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - large homebuilders continue to win market share, which supports Evergrande's aim to increase sales by 15% to 25% between 2017 and 2019 - ASP in 2017 to match 1Q17 level and continue to climb at around 3%-5% thereafter, with higher-tier cities making up a larger share of sales - land acquisition volume to stay at 120% of the gross floor area sold in the same year - trade payables and receivables to grow in line with contracted sales growth RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Net debt/adjusted inventory sustained below 50% (59% in 2016) - Contracted sales/gross debt sustained above 0.8x (0.57x in 2016) - EBITDA margin sustained above 18% (16.5% in 2016) Developments That May, Individually or Collectively, Lead to Negative Rating Action - Net debt/adjusted inventory sustained above 60% - Total payables/gross inventory sustained above 0.45x (0.42x in 2016) - Tighter liquidity position due to weaker access to financing channels LIQUIDITY Large Liquidity Gives Flexibility: Evergrande has continued to maintain a large cash balance totalling CNY304 billion, including CNY106 billion of restricted cash, and CNY138 billion of available undrawn but uncommitted facilities to meet its debt servicing and operation needs. This was higher than CNY164 billion in total cash (CNY61 billion restricted) and CNY155 billion in facilities in 2015. The company also issued USD2.5 billion of senior notes in 1Q17 to refinance its existing debt. Contact: Primary Analyst Vicki Shen Director +852 2263 9918 Fitch (Hong Kong) Limited 19/F 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: 24 April 2017 Summary of Financial Statement Adjustments - - Perpetual capital instruments of CNY113 billion are treated as debt - Financial assets (both long-term and short-term) are adjusted at 40% and included in available cash Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers - Effective from 21 November 2016 to 16 June 2017 (pub. 21 Nov 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis- Effective from 26 February 2016 to 27 April 2017 (pub. 29 Feb 2016) 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. 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below