China Evergrande and its two subsidiaries Hengda and Tianji were downgraded two notches by Moody’s, following similar actions by S&P and Fitch last week. Evergrande and Hengda were downgraded to Caa1 from B2 and Tianji to Caa2 from B3. The rating outlook was also changed to negative from ratings under review. “The downgrades reflect Evergrande’s heightened refinancing risk over the coming 12-18 months given its weakened funding access and liquidity position,” said Cedric Lai, a Moody’s VP. Moody’s expects profit margins to decline as the company lowers the selling prices of its properties to preserve liquidity.
Evergrande’s cash on hand of CNY 181bn ($28bn) would be insufficient to cover short-term debt of CNY 335bn ($52bn) as at end-2020. Given that Evergrande has to rely on internal cash for repaying maturing debt, its primary objective of generating cash from property sales will continue to squeeze profit margins, expecting gross margins to decline to 16-18% in the next 12 months from 24% in 2020. They also expect Evergrande to reduce spending on land and control debt growth over the next 12-18 months, given high debt leverage. Its interest coverage will also weaken to 1.3x over the next 12-18 months from 1.4x in 2020. Hengda was downgraded due to its close linkage with Evergrande, accounting for 88% of Evergrande’s revenue and 81% of its reported debt.
Separately, Leo Group Co., a machinery manufacturing and company also engaged with provision of Internet services, said it filed a lawsuit against Hengda Real Estate to pay for advertisements, asking a Shenzhen court to freeze some of the unit’s assets, including bank accounts. Evergrande’s dollar bonds were mixed – its 11.5% 2022s were up 1.1 to 40.2 and its 7.5% 2023s were down 0.3 to 45.5 cents on the dollar.
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