Published on 11 Aug 2023.
RAM Ratings has downgraded the long-term rating of Country Garden Real Estate Sdn Bhd (CGRE)’s Islamic Medium-Term Notes Programme (IMTN) to BBB3(s) from AA3(s)/Negative. Concurrently, the rating has been placed on Rating Watch, with a negative outlook. This follows the same rating action taken in respect of CGRE’s ultimate parent company, China-based developer Country Garden Holdings Company Limited (Country Garden or the Group).
The steep downgrade of Country Garden’s long-term ratings is premised on an unexpected missed payment of coupons on its dollar bonds and the Group’s stressed liquidity position. The weak liquidity is a reflection of the rapid deterioration of China’s housing market in recent months despite an earlier rebound, and prevailing market conditions made worse by poorer market and investor confidence leading to tighter financing conditions. The coupon non-payment, if not remedied within the 30-day grace period, triggers a cross-default on CGRE’s IMTN.
In our December 2022 rating review and update in April 2023, we took comfort in the Group’s strong liquidity, as demonstrated by its ability to obtain various funding facilities despite tough market conditions last year and its position as one of China’s largest developers. As at end-December 2022, Country Garden’s contracted sales were sizeable (albeit weaker y-o-y) and unencumbered cash (excluding escrow funds) stood at RMB87.61 bil, just slightly falling short of short-term debts (RMB93.70 bil). We had also expected debt coverage to weaken to around 0.20 times, thus underpinning the negative outlook.
These metrics now look unattainable, given the unexpected turn of events and significant underperformance of the Group’s property sales. The adverse impact of the coupon non-payment on its reputation and consumer perception of the Group’s ability to deliver properties as well as its future ability to access financing will add pressure.
In 7M 2023, Country Garden’s property sales slid 35%, counter to expectations of mild growth from a low base last year (2022: -36%). The Group’s performance also lagged the industry’s (1H 2023: -2%) as well as that of China’s top 100 developers (7M 2023: -5%), partly due to its cautious stance in rolling out new launches. In view of softening industry conditions and its weaker liquidity, the Group is unlikely to catch up on new launches for the rest of the year, notwithstanding the Chinese government’s reiteration and pledge of financial support for private developers in July.
Even if the Group can remedy the missed coupon payments, it faces significant debt repayment for the remainder of this year. While temporary financial support and easing policies may moderate its tight liquidity position, the Group’s longer-term prospects will hinge on its sales performance. The rapid and severe housing market slowdown, coupled with difficulties in reviving the sector and the resultant uncertainty over turnaround prospects, suggest that it is unlikely Country Garden’s future debt coverage levels will meet our earlier expectations.
The Negative Rating Watch indicates the likelihood of further negative rating action. At this point, we have yet to gain a meaningful insight on Country Garden’s plan to address its liquidity challenges. The failure of CGRE to honour RM12 mil of IMTN profit payments becoming due in September and November may accelerate a default in early September and a downgrade of the IMTN rating to D. Nonetheless, we understand that CGRE has about RM110 mil in unrestricted cash at this juncture which can be used to meet upcoming coupon payments. We will continue to monitor developments on this front and reassess the ratings when more details are available.
The rating of the IMTN is based on unconditional and irrevocable corporate guarantees extended by Country Garden and its subsidiaries, Bright Start Group Limited and Top Favour Holdings Limited. As the guarantees have been provided on a joint and several basis, the rating reflects the credit profile of Country Garden, the strongest obligor.
RAM’s Rating Watch highlights a possible change in an issuer’s debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under RAM’s special surveillance. In a broader sense, the Rating Watch covers any event that may result in changes in risk factors relating to the repayment of principal and interest.
Issues are put on Rating Watch when some of the abovesaid events are expected to or have occurred. The Rating Watch, however, does not mean that the rating will inevitably be changed. It only means that RAM is evaluating the rating and a final affirmation is pending. A “positive” outlook indicates that a rating may be raised while a "negative" outlook indicates a possible downgrade. A “developing” outlook refers to unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.
Karin Koh, CFA
(603) 3385 2508
Thong Mun Wai
(603) 3385 2522
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Ratings on Country Garden Real Estate Sdn Bhd