(The following was released by the rating agency)
-- The pressure on Coastal Greenland's liquidity materially reduced after the company recently repaid its senior unsecured notes and some high-cost trust loans.
-- We are raising the long-term corporate credit rating on the China-based property developer to 'B-' from 'CCC+' and the Greater China regional scale rating to 'cnB-' from 'cnCCC+'.
-- We are also withdrawing the 'CCC' issue rating because the company has fully redeemed its senior unsecured notes.
-- The negative outlook reflects our view that the company's cash flows will likely remain weak and its liquidity depends on the timely completion of asset sales.
On Nov. 9, 2012, Standard & Poor's Ratings Services raised the long-term corporate credit rating on China-based real estate developer Coastal Greenland Ltd. to 'B-' from 'CCC+'. The outlook is negative. We also raised the long-term Greater China regional scale rating on the company to 'cnB-' from 'cnCCC+'. At the same time, we withdrew the 'CCC' issue rating and 'cnCCC' Greater China regional scale rating on Coastal Greenland's senior unsecured notes after the company fully redeemed the notes on Nov. 8, 2012.
We raised the ratings to reflect our view that Coastal Greenland no longer faces immediate and significant repayment risk on its offshore bond and its large trust loans due by the end of 2012. The company has raised funds from asset sales, private investors, and trust lenders to meet the repayment of these debt obligations. The company's refinancing needs appear to have passed the peak. We have revised our assessment of Coastal Greenland's liquidity to "less than adequate" from "weak," as our criteria define those terms. The revision reflects our view that the company has just sufficient liquidity to meet its obligations. We continue to view Coastal Greenland's business risk profile as "vulnerable" and its financial risk profile as "highly leveraged."
Coastal Greenland's refinancing capacity has increased due to improving credit conditions. The company repaid US$129 million in senior unsecured notes on their maturity using proceeds from a US$60 million offshore loan from a private investor and new onshore trust financing. We also expect the company to repay a RMB500 million trust loan maturing at the end of November 2012 by using proceeds from asset sales or new trust loans. The company's new financing has higher costs, which could put further pressure on its cash flows.
We estimate that Coastal Greenland's liquidity sources have widened to cover liquidity uses by about 1.0x over the next year, compared with about 0.8x three months ago. The company's liquidity position is dependent on asset sales as property sales remain weak. Recent asset sales include that of an equity interest in an associate company for RMB452.4 million and an asset swap with its second-largest shareholder, Shenzhen Investment Ltd. (not rated) with net proceeds of RMB335 million. We expect the company to sell several other projects, as and when needed, to support liquidity. We expect approval from shareholders for the asset swap this month.
Coastal Greenland's property sales are likely to remain weak in the next six to 12 months even though property market conditions are stabilizing in China. This is because the company has a limited number of projects, a shrinking portfolio due to asset sales, and high concentration in cities with purchase restrictions. In our base-case scenario, we estimate contracted property sales at about Hong Kong dollar (HK$) 4.0 billion for fiscal 2013 (ending March 2013). From April-October 2012, Coastal Greenland generated sales of about HK$2.0 billion. Due to its shrinking portfolio of projects, we are unclear if the company can sustain this level of property sales after 2013.
We anticipate that Coastal Greenland's leverage will remain high and its cash flow will be weak over the next year, mainly because poor property sales and high financing costs more than offset modestly lower total borrowings by the end of fiscal 2013.
To refinance its debt maturities, Coastal Greenland has secured trust loans and offshore loans at higher interest rates than those for its existing loans, highlighting its weak credit profile and limited financial flexibility. In our base case, we estimate the company's adjusted debt to EBITDA ratio at about 8.0x (2012: 3.2x ) and EBITDA interest coverage at about 1.0x (2012: 3.5x) for fiscal 2013. The deterioration is mainly attributable to a large amount of back-loaded recognition in fiscal 2012 of properties sold over a year ago.
We view Coastal Greenland's liquidity as less than adequate because we expect the company's sources of liquidity to cover about 1.0x of its liquidity uses in the next 12 months. Our assessment incorporates the following expectations and assumptions:
-- Primary liquidity sources in fiscal 2013: an unrestricted cash balance of HK$1.9 billion as of March 31, 2012; new loans drawdown of about HK$2.5 billion during April-October 2012; expected cash receipts of about HK$1.0 billion from asset sales; and cash receipts from property sales of about HK$3.8 billion.
-- Primary liquidity uses in fiscal 2013 include: short-term debt of HK$5.0 billion as of March 31, 2012; construction costs of about HK$2.0 billion; interest expenses of about HK$585 million; sales and administration costs of about HK$350 million; and taxes.
The company's liquidity buffer is limited and depends on further asset sales. Liquidity is sensitive to property sales and could deteriorate if payment for asset sales is delayed.
The negative outlook reflects our view that the company's cash flows will likely remain weak and its liquidity depends on the timely completion of asset sales. The outlook also reflects our uncertainty about the company's ability to maintain its market position as it shrinks its portfolio of projects.
We could lower the rating if the company's property sales and cash holdings are materially weaker than we expected. This could happen if property sales are less than HK$3.0 billion in fiscal 2013 and EBITDA interest coverage is less than 1.0x. We could also downgrade the company if we believe that its ability to refinance its borrowings is curtailed or generally its liquidity is not sufficient to meet short-term obligations.
We could revise the outlook to stable if the company improves and sustains its property sales, and reduces its borrowings.
Related Criteria And Research
-- Summary: Coastal Greenland Ltd., Aug. 30, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria | Corporates | Industrials: Key Rating Factors For Chinese Real Estate Developers, June 2, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Upgraded To From
Coastal Greenland Ltd.
Corporate Credit Rating B-/Negative/-- CCC+/Negative/--
Greater China Regional Scale cnB-/--/-- cnCCC+/--/--
Not Rated Action
Senior Unsecured NR cnCCC
Senior Unsecured NR CCC