Sunac China was downgraded to B1 from Ba3 with a negative outlook and its senior unsecured ratings to B2 from B1 on the back of its “reduced liquidity buffer due to its constrained funding access and weakened operating cash flow”. Lower contracted sales over the next 6-12 months, after falling 30% YoY in Q4 2021, combined with declining profit margins are expected to pressure its key credit metrics – EBIT/interest coverage is set to decrease to 1.8-2.0x over the next 12-18 months from 2.6x at end-June 2021 and debt leverage (revenue/debt), will slip to 55-60% from 70% during the same period. However, Sunac has $1.2bn of offshore bonds maturing before the end of 2022 and Moody’s expects liquidity to be adequate with the developer raising more than RMB 20bn ($3.2bn) via equity placements, asset and investment disposals, and interest-free loans from controlling shareholders since October 2021. But Sunac will face uncertainty in its plan for further asset sales as the market is currently highly challenging.
Despite the rating action, dollar bonds of Sunac and others like Times China rallied 5-8% on Friday. Besides, those of Agile and Shimao were also on the gainers list, rallying about 3-5%. Bloomberg notes that the gain in developers’ bonds comes on the back of reports that the government issued rules to make it easier to tap cash from home presales, potentially easing a liquidity crunch.
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