Gemdale International Investment Limited -- Moody's assigns Ba3 to Gemdale's proposed bond; outlook stable
At the same time, Moody's has affirmed Gemdale Corporation's Ba1 corporate family rating, Famous Commercial Ltd's Ba3 corporate family rating, and Gemdale International Holding Limited's Ba3 senior unsecured bond rating.
The outlook on all ratings is stable.
The proposed bonds will be guaranteed by Famous and supported by a Deed of Equity Interest Purchase Undertaking and a Keepwell Deed between Famous, Gemdale Corporation and the bond trustee. There will also be 12 months of interest reserves in an offshore interest reserve account.
All the net proceeds will be used for debt refinancing.
"The proposed bonds -- which will replace Famous' existing bank loans ultimately guaranteed by Gemdale Corp -- will slightly increase Famous' repayment risk," says Kaven Tsang, a Moody's Vice President and Senior Analyst.
"But Moody's also expects that the amount of the new bond will be maintained at a manageable level, such that Famous' projected standalone credit metrics -- including total debt/total assets not exceeding 60%-70% (after repayment of existing debt) and EBITDA/interest not less than 1.5x -- will remain appropriate for its B2 standalone credit profile," adds Tsang, also Moody's lead analyst for Gemdale.
Any deviation from such expectation would pressure the ratings and/or their outlook.
Famous' B2 standalone credit profile also considers the fact that it is part of the Gemdale group.
"Additionally, the proposed bonds will improve Famous' funding stability by lengthening its debt maturity profile," says Tsang.
Famous' Ba3 corporate family rating reflects its B2 standalone credit profile and a two-notch rating uplift, based upon the financial and operational support provided by Gemdale Corp.
The two notches of uplift incorporate (1) Gemdale Corp's 100% ownership of Famous; (2) Gemdale Corp's track record of financial support to Famous; and (3) the fact that all Famous' projects are operated by Gemdale Corp, thereby offering cost efficiency and a strong brand name.
Famous' B2 standalone credit profile further reflects its small scale operation of 13 projects in 6 cities; its land bank of about 3 million sqm in GFA, and annual contract sales of approximately RMB3 billion. Furthermore, as 6 projects are in only one city, Moody's expects a high degree of volatility in Famous' sales performance.
Separately, Gemdale Corp's Ba1 corporate family rating reflects its established track record in China's property market. The company demonstrated resilience to the economic down-cycles prevalent in both 2008 and 2011. It achieved contract sales growth of 17% in 2008, and 9% in 2011, supported by its established brands and wide geographic coverage of approximately 70 projects across 20 cities.
The rating also reflects Gemdale Corp's good access to funding and flexibility in managing its funds. It is one of the few Chinese property developers that can raise unsecured loans at the corporate level. Such an ability provides it with the flexibility to invest surplus liquidity in projects according to its business plan. In addition, Gemdale Corp has widened its funding sources by raising offshore financing through its overseas subsidiary, Famous Commercial Ltd.
Another rating driver is Gemdale Corp's strong liquidity, as evidenced by its high level of cash -- RMB19 billion as of 30 June 2012 -- which more than covers its short-term debt obligations of RMB12 billion.
Gemdale Corp also exhibits a cautious approach to land acquisitions. It has a land bank of around 19 million square meters, which is small relative to most of its Ba-rated peers. However, this land bank is adequate for its development over the next five years.
Moreover, Gemdale Corp has a stable management team. Four of the six executive directors on its board, including the chairman and the CEO, have been working in the company for around 20 years.
Famous' stable rating outlook reflects Moody's expectation that it will stay well managed by Gemdale Corp, which provides financial and operational support.
Famous' ratings could come under downward pressure if it (1) fails to execute its business plan, such that sales and operating cash flow generation are weaker than anticipated; and/or (2) materially accelerates development and executes an aggressive land acquisition plan, such that debt leverage increase with total debt/total assets exceeding 65%-70%, and EBITDA/interest dropping below 1x-1.5x on a sustained basis.
An increase in refinancing pressure due to more than 40% of its total debt maturing in one year will also pressure the rating.
Additionally, any evidence of a weakening in the support from Gemdale Corp to Famous, or a deterioration in Gemdale Corp's own credit profile could also be negative for the ratings.
On the other hand, upward rating pressure on Famous could emerge if it can (1) successfully implement its business plan; (2) improve its scale and diversity to reduce sales and earnings volatility; and (3) improve its credit profile.
Credit metrics which Moody's would consider for an upgrade for Famous include an improvement in its financial profile with its total debt/total assets falling below 50% and EBITDA/interest rising above 3x on a sustained basis.
The principal methodology used in rating Gemdale Corporation, and Famous Commercial Ltd was the Global Homebuilding Industry Methodology published in March 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Incorporated in China, Gemdale Corporation is one of the leading developers in China's residential property sector. It was founded in 1988 and listed on the Shanghai Stock Exchange in 2001.
Incorporated in Hong Kong in 1995, Famous Commercial Ltd is a wholly-owned subsidiary of Gemdale Corporation. It was initially established as a sales office in Hong Kong to sell Gemdale's property projects to overseas customers. It was eventually developed as an offshore holding company, housing some of Gemdale's property projects in China. It also serves as a funding vehicle in the overseas market.
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