China’s Country Garden (COGARD) was downgraded to Ba2 from Ba1 with a negative outlook by Moody’s. This comes a day after S&P’s downgrade to BB from BB+. The Moody’s downgrade was on account of weaker than expected contracted sales and expectations of its financial metrics and liquidity buffer weakening further in the next 12-18 months. Gross profit margins were revised lower to 12.5-13.0% for 2022 and 2023 from the previous forecast of 15%. EBIT/interest coverage is expected to weaken to around 3x in the next 12-18 months from 3.7x as of June 2022. From January-August 2022, COGARD’s contracted sales fell 40% to RMB 244bn ($34.6bn) due to the weak property market and disruptions caused by pandemic in China. As of June, the company had unrestricted cash of RMB 123bn ($17.5bn), which could cover 1.7x of its current debt of RMB 73bn ($10.4bn). Moody’s expects the company to use internal resources to repay the debt which will reduce its liquidity buffer and financial flexibility due to constrained access to capital markets for long-term funding.
Country Garden’s 4.8% 2030s were trading 0.5 points lower at 39 cents on the dollar, yielding 20.93%.