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TEXT-S&P afrms Fantasia 'BB-' rtg;rates proposed notes 'B+'
January 15, 2013 / 8:17 AM / 5 years ago

TEXT-S&P afrms Fantasia 'BB-' rtg;rates proposed notes 'B+'

(The following statement was released by the rating agency)

Jan 15 -

Overview

-- The operating performance of Fantasia, a property developer, generally met our expectations in 2012.

-- We expect the China-based company’s sales and profitability to be satisfactory in 2013, given a stabilizing property market.

-- We are affirming our ‘BB-’ long-term corporate credit rating and ‘cnBB’ long-term Greater China regional scale rating on Fantasia, and affirming the ratings on its existing issuance. We are also assigning our ‘B+’ issue rating to the company’s proposed senior unsecured notes.

-- The negative outlook reflects our expectation that Fantasia’s debt-funded expansion will be aggressive and could weaken its leverage.

Rating Action

On Jan. 15, 2013, Standard & Poor’s Ratings Services affirmed its ‘BB-’ long-term corporate credit rating on Fantasia Holdings Group Co. Ltd. The outlook is negative. We also affirmed the ‘B+’ issue rating on the company’s existing senior unsecured notes. In addition, we affirmed the ‘cnBB’ long-term Greater China regional scale rating on Fantasia and the ‘cnBB-’ issue ratings on the notes. At the same time, we assigned our ‘B+’ and ‘cnBB-’ issue ratings to the company’s proposed issue of benchmark-sized senior unsecured notes due 2020. The rating is subject to our review of the final issuance documentation.

Rationale

We affirmed the ratings on Fantasia because we expect the company to generate satisfactory sales and profitability in 2013, while borrowings are likely to be higher than we previously expected. We also anticipate that the company can maintain adequate cash flow protection, after taking into consideration its financing plan, which includes the proposed notes. We continue to view Fantasia’s business risk profile as “weak” and the financial risk profile as “aggressive,” as defined in our criteria.

Fantasia’s sales and profitability will likely remain steady in 2013, given a stabilizing property market in China. The company has improved its sales execution, particularly in projects outside Shenzhen and Chengdu, its home markets. Fantasia’s overall operating performance in 2012 met our expectation. Contract sales increased 14.5% year over year to Chinese renminbi (RMB) 8.01 billion. The sales slightly exceeded our expectations, despite weak demand in the first half of 2012. Some 62% of Fantasia’s sales were from cities other than Shenzhen and Chengdu in 2012.

Fantasia has become more aggressive with debt-funded expansion compared with the last few years. The company raised US$250 million in offshore debt as of September 2012, and used just 30% of this amount for refinancing; it used the remainder for land acquisitions and for general working purposes. We expect the company’s total debt to have increased to about RMB8 billion as of the end of 2012, about 45% higher than a year earlier. Fantasia will mainly use debt for land acquisitions and construction.

Fantasia’s historically low land costs allow the company to price competitively, generate good cash flows, and maintain stable profit margins, compared with peers that we also rate ‘BB-'. Fantasia’s EBTIDA margin has been more than 30% for the past three years despite the subdued property market in 2011 and 2012. We are uncertain if the company can sustain its low land costs as it increases acquisitions for its land bank in tier-one cities, such as Shenzhen and Beijing. However, high-cost land comprises only a small portion of Fantasia’s total land bank as of the end of 2012.

In our base case, we expect increased sales and stable profit margins to offset borrowings that are higher than we previously expected. In our view, Fantasia should benefit from stability in the property market and its expanding operating scale. For 2012 and 2013, we expect contract sales and revenue recognition to increase steadily, at an annual growth of 15%-20%. We also anticipate that the company can maintain its EBITDA margin above 30%. Nevertheless, a faster increase in borrowings will temper the improvement and weaken leverage. Fantasia’s debt-to-EBTIDA ratio will likely rise to about 3.5x-4x in 2012-2013, compared with 3x in 2011. EBITDA interest coverage should decline to 3x, compared with 3.6x in 2011.

The issue rating on Fantasia’s proposed notes is one notch lower than the corporate credit rating to reflect our opinion that offshore noteholders would be materially disadvantaged, compared with onshore creditors, in the event of default. In our view, the company’s ratio of priority borrowings to total assets will remain above our notching threshold of 15% for speculative-grade debt.

Liquidity

In our view, Fantasia’s liquidity is “adequate,” as defined in our criteria. We estimate that the company’s liquidity sources will be more than 1.2x its uses in the next 12 months. Our view is based on the following major factors and assumptions:

-- Fantasia’s contract sales will be about RMB9 billion in 2013.

-- As of Dec. 31, 2012, the company should have about RMB3 billion in unrestricted cash against about RMB1.2 billion in short-term debt.

-- Fantasia has about RMB500 million in land premiums that are payable in 2013.

-- The company has some room to cut its budgeted costs for construction and new land acquisitions.

-- We have not factored in potential capital-raising that the company may consider to improve its leverage.

-- We have not included any uncommitted bank lines in liquidity sources because approval is on a case-by-case basis.

In 2013, we expect Fantasia to continue to have sufficient headroom in the financial covenants of its outstanding senior notes and offshore bank loan, based on our base-case scenario. Covenants include a net gearing ratio of no less than 0.9x for its loan and a fixed-charge coverage ratio of more than 3.5x for its existing notes.

Outlook

The negative rating outlook on Fantasia reflects our expectation that the company’s debt-funded expansion will be aggressive and its leverage could deteriorate more than we previously expected. We anticipate that the company can maintain disciplined financial management and “adequate” liquidity while pursuing growth.

We may lower the rating if Fantasia’s debt-funded growth is more aggressive than we currently expect, or its sales or margins are much lower than our projections, such that its EBITDA interest coverage is less than 3x and its debt-to-EBITDA ratio is more than 4.5x on a consistent basis.

We may revise the outlook to stable if Fantasia’s sales execution improves and its property sales meet our expectation, and the company maintains its consistent financial management. EBITDA interest coverage of more than 3x and a gross margin that is consistently above 40% would indicate such strength.

Related Criteria And Research

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed

Fantasia Holdings Group Co. Ltd.

Corporate Credit Rating BB-/Negative/--

Greater China Regional Scale cnBB/--/--

Fantasia Holdings Group Co. Ltd.

Senior Unsecured B+

Senior Unsecured cnBB-

New Rating

Fantasia Holdings Group Co. Ltd.

Senior Unsecured B+

Senior Unsecured cnBB-

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