Fitch Affirms Guorui's 'B-' Ratings; Outlook Negative; Off RWN
(The following statement was released by the rating agency)Fitch Ratings-Hong Kong-16 March 2021:
Fitch Ratings has affirmed China-based homebuilder Guorui Properties Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B-' with Negative Outlook. The senior unsecured rating has been affirmed at 'B-' with Recovery Rating of 'RR4'. The ratings have been removed from Rating Watch Negative, on which they were placed in January 2021, after Guorui completed an exchange offer and subsequently redeemed its USD455 million bonds that turned puttable in February 2021.
The Negative Outlook reflects the company's sustained weak liquidity position, and the likelihood of the company having difficulties meeting its obligations as its USD323.7 million senior notes due January 2024 become puttable in April 2022. The rating affirmation is based on Guorui's controlled leverage, sufficient saleable resources and quality land bank that supports sustainable sales activities.
Key Rating Drivers
Tight Liquidity: Fitch estimates that Guorui's unrestricted cash on hand at end-2020 would not be sufficient to cover its short-term debt or short-term capital market maturities. Guorui's ratios of unrestricted cash to short-term debt and to short-term capital-market maturities have been consistently below 20% and 40%, respectively, since end-2018, which reflects poor liquidity management, in Fitch's view.
While we estimate Guorui's liquidity would improve by end-2021 on recovering sales and limited land acquisitions, the ratio of cash to short-term capital-market maturities (USD328.6 million) is likely to remain below 1x. Given the challenging operating environment in 2021, especially for small developers like Guorui, weaker-than-expected internal cash generation would pressure the company's liquidity position and its ratings.
Ongoing Refinancing Risk: After the completion of the exchange offer in January 2021 and redemption of the majority of the outstanding USD455 million bonds in February 2021, Guorui will have USD328.6 million bonds that are due or become puttable in 1H22. Guorui plans to refinance part of the bonds with onshore and offshore bonds issuances, which Fitch sees as carrying high execution risk.
Limited Market Access: Guorui's access to the local bond market appears limited, as it has not issued any domestic corporate bonds since 2017. Fitch is also of the view that new US dollar bond issuance is likely to carry high borrowing costs under weak conditions in the debt markets.
Sufficient Saleable Resources Support Sales: Fitch forecasts Guorui's consolidated sales at CNY10.5 billion-11 billion in 2021, supported by CNY31.3 billion of saleable resources at end-2020, of which more than 50% are from projects located in Tier 1-3 cities (36% from Beijing) with satisfactory sell-through rates. Guorui's sales fell by 7% in 2020, when sales and construction activities were affected by Covid-19 related social distancing restrictions. Guorui's sales was also affected by the renewal of restrictions in Beijing, where it has more exposure, to control re-emergence of Covid-19.
Quality Land Bank: Fitch estimates Guorui's total land bank, excluding presold land, decreased to 7.6 million square metres (sqm) by end-2020, from 11.2 million sqm a year ago, after it deconsolidated eight projects and halted land acquisitions during the year. Its land bank, however, is still sufficient to support sales for the next 8-10 years. Fitch believes Guorui has room to deleverage as it is not under immediate pressure to replenish its land bank. Most of Guorui's land bank is located in Tier 1-2 cities or Tier 3 cities benefitting from spill-over from core cities, where demand remains robust.
The average cost of Guorui's land bank was less than 30% of its average selling price, as most of the land was acquired years ago. Fitch expects Guorui to continue enjoying a healthy EBITDA margin of around 25% (2019: 24.7%) in 2021-2022. This is lower than the historical 30% and above, due to housing price limits in the pan-Beijing area, but it is still healthy and higher than the EBITDA margin of most of its peers in the same rating category.
Moderate Leverage: Guorui's leverage at end-2020 would have risen slightly to above 60% in our estimate (end-2019: 58.1%), mainly due to slower cash collection. Guorui's consolidated cash collection rate was low at less than 75% in 2020 (2019: more than 100%), mainly due to more sales towards the end of the year, with more than 40% of sales in 4Q20. We estimate Guorui to deleverage slowly to 55%-60% during 2021-2022, in view of controlled land acquisitions and gradually improving sales, as well as cash recycling from uncollected sales from previous years.
ESG - Governance: Guorui has an ESG Relevance Score of '5' for Management Strategy - a level indicating that the company's rating is affected by this environmental, social and governance (ESG) sub-factor - in light of its weak liquidity management. Fitch believes management needs to establish a clearer and longer record in consistently improving liquidity conditions before the rating constraint is removed.
Guorui's ratings are supported by its large land bank, which is enough for 8-10 years of development, longer than that of peers in the 'B' rating category, which have land bank life of three to five years. The quality of Guorui's land bank is satisfactory, with an average selling price of around CNY15,000/sqm and more than 90% of its land bank is in Tier 1-2 cities or surrounding satellite cities. Its cheap land cost supports healthy profitability of around 25%, a level better than that of peers such as Modern Land (China) Co., Limited (B/Stable), which has an EBITDA margin of 15%-20%.
Guorui's annual sales of CNY10 billion is comparable with 'B-' peers, which typically have sales of CNY10 billion-20 billion, such as Xinyuan Real Estate Co., Ltd. (B-/Stable). Guorui's leverage of around 60% is comparable with that of Skyfame Realty (Holdings) Limited (B-/Stable). However, Guorui's ratings are constrained by its poor liquidity, which is weak compared to 'B' category peers, which typically have cash to short-term capital-market maturities ratios above 1x.
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Consolidated contracted sales to be of CNY10.5 billion-11.5 billion per year during 2021-2023, with a cash collection rate of 80%-90%.
- 20%-30% of contracted sales proceeds to be spent on land acquisitions during 2021-2023
- 35%-40% of contracted sales proceeds to be spent on construction during 2021-2023
- EBITDA margin, excluding capitalised interest from cost of sales, at around 25% during 2021-2023
- Average funding cost to be 8.5%-9% during 2021-2023
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Guorui would be liquidated in bankruptcy
We have assumed a 10% administrative claim.
- The liquidation estimate reflects Fitch's view of the value of balance sheet assets that can be realised in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
- Advance rate of 100% applied to cash and restricted cash
- The 75% inventory advance rate supported by a quality asset base, which can generate an EBITDA margin of around 25%
- Advance rate of 60% applied to property, plant and equipment
- Advance rate of 45% applied to investment properties is supported by Guorui's investment properties in Beijing and Tier-2 cities, that together generate rental yield of above 3%
- Trade payables and onshore borrowings are superior to offshore senior unsecured debt in the waterfall.
- We used the post-exchange offer amount of US dollar obligations (USD4.9 million + USD323.7 million) in the analysis.
The allocation of value in the liability waterfall results in recovery corresponding to an 'RR3' Recovery Rating for offshore senior unsecured debts. However, the Recovery Rating for senior unsecured debt is capped at 'RR4' because under Fitch's Country-Specific Treatment of Recovery Ratings Criteria, China falls into Group D of creditor friendliness, and the Recovery Ratings of issuers with assets in this group are subject to a cap of 'RR4'.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Increased cash balance and improved debt maturity profile on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Inability to address short-term debt, in particular the USD323.7 million of bonds that turn puttable in April 2022
- No meaningful improvement in liquidity position
- Leverage sustained above 65%
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Tight Liquidity: Fitch estimates that Guorui's unrestricted cash on hand at end-2020 was not sufficient to cover its short-term debt or short-term capital market maturities. Guorui's ratio of unrestricted cash to short-term debt has been consistently low at 20% and below since 2017 (end-1H20: 18% and less than 0.2x at end-2020 by Fitch's estimate), which reflects poor liquidity management, in Fitch's view.
Bank Loans Dominate Debt: Guorui relies heavily on secured bank loans, which mainly consist of operational loans and development loans. These accounted for around 80% of total borrowings at end-2020 (end-2019: 81%). It has limited accesses to capital markets and faces high costs for refinancing.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
Guorui has an ESG Relevance Score of '5' for Management Strategy due to its weak liquidity management, which has a negative impact on the credit profile, and is highly relevant to the rating.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Guorui Properties Limited; Long Term Issuer Default Rating; Affirmed; B-; Rating Outlook Negative
----senior unsecured; Long Term Rating; Affirmed; B-; Rating Watch Off
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