Moody’s upgraded Chinese real estate developer Logan Group by a notch to Ba2 from Ba3. Moody’s also upgraded its senior unsecured debt ratings to Ba3 from B1 and revised the outlook from stable to positive. The strong brand name, good liquidity position and a track record of developing and focusing mass market residential properties and products helping sales and operating cash flows were reflective of the rating. While Logan’s rating is constrained by its geographic focus on southern China (70% of its total land bank by gross floor area located there), Moody’s expects saleable resources and sales execution to grow contracted sales to CNY 135-145bn ($20.9-$22.4bn) in 2021. Also, solid housing demand and market positioning are expected to help reduce concentration risk. On the financial front, Moody’s expects debt leverage (revenue/adjusted debt) to improve to 77%-83% by mid-2022 from 71% in June 2020 driven by revenue recognition of prior contracted sales. They expect adjusted EBIT/interest to remain strong at 4.2x from 4.4x over the same period. Liquidity is firm with cash balances of CNY 41.9bn ($6.5bn), covering 1.35x short-term debt. The Ba3 debt rating is one notch lower than the corporate rating due to structural subordination risk – majority of the company’s claims are at operating subsidiaries and have priority over claims at the holding company in the event of liquidation; also the holding company lacks significant mitigating factors for structural subordination, which could lead to lower expected recovery rates for claims at the holding company.
The upgrade comes at a time when regional peer China Fortune Land Development (CFLD) has witnessed a series of rating downgrades over the past few weeks with its dollar bonds beaten down to 30-40 cents on the dollar. Logan’s 7.5% 2022s were flat at 102.44 yielding 1.4% and their 4.5% 2028s were at 99.21, yielding 4.6%.
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