Fitch Rates Franshion's US Dollar Notes 'BBB-(EXP)'

Tue Oct 8, 2013 10:47pm EDT

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, October 08 (Fitch) Fitch Ratings has assigned China-based homebuilder Franshion Properties (China) Limited's (Franshion, 'BBB-'/Stable) proposed senior unsecured USD notes an expected rating of 'BBB-(EXP)'. The bonds are rated at the same level as Franshion's senior unsecured rating because they represent direct, unconditional, unsubordinated and unsecured obligations of the company. The final rating of the proposed notes is contingent upon the receipt of documents conforming to information already received. The proceeds will be used to refinance outstanding debt, to fund capital expenditure, and for other general corporate purposes. KEY RATING DRIVERS Significant Growth in Development: Franshion's contracted sales from property development rose to HKD11.2bn in H113 from HKD5.6bn in H112, reflecting a significant ramp-up of its development business, particularly in Meixi Lake, Changsha, capital of Hunan province. Franshion also increased its land bank to 6.9 million square metres (sq m) at end-2012 from 4.1 million sq m at end-2011. Active property development has continued in H213, and Fitch believes Franshion is likely to achieve its annual sales target. Stable Recurring Income: Recurring income from the company's investment property and hotels business has had more subdued growth - HKD1.7bn in H113 versus HKD1.6bn in H112. Fitch does not expect faster growth in recurring income within the next 12 months, until substantial new investment properties - including the Nanjing International Center acquired in February 2013 - start to contribute to this segment. This is because of slower growth in office rentals and the call from the Chinese government for less overt public spending in 2013. Stagnant Coverage Ratio: Net borrowing is not expected to increase substantially over the next 12 months, but the recurring EBITDA coverage ratio will likely stay below 1.5x in the next 12 to 18 months until the scale of investment properties and hotels in operation increases substantially. Advantage in Government Links: Franshion's business continues to be supported by its status as a state-owned property company. This provides the company with an advantage in government-led strategic projects, and helps provide strong access to domestic bank funding. This is illustrated by the favourable location of its investment properties and commercial development projects. Healthy Financial Positions: Net debt/estimated adjusted inventory, excluding market revaluation of investment property, is not expected to increase substantially in the next 12 months from 42% at end-H113, given sales performance, sufficient liquidity, and estimated capex for future development. Its strong relationship with domestic banks and diversified funding sources also keep Franshion's financial management flexible. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Significant decrease in contracted sales of project development in 2013 - Net debt/adjusted inventory excluding revaluation adjustment of investment property remaining above 45% on a sustained basis (H113: 42% estimated by Fitch) - Recurrent EBITDA/gross interest expense ratio falling below 1.0x on a sustained basis (H113: 0.9x-1.0x, estimated by Fitch) - Reduced ties with state-owned majority stakeholder Sinochem Group, including a reduction in Sinochem Group's equity stake in Franshion to under 51% (62.87% of shareholding at end-H113), or a shift from strategic projects due to weakened relationships with local governments, reduced access to onshore bank loans or inter-company funding support Positive: Future developments that may, individually or collectively, lead to positive rating action include: -I ncreasing the portfolio size of investment properties and hotels above CNY30bn in value (2012: CNY16.6bn), while maintaining recurrent EBITDA/gross interest expense above 2.5x - Sales from project development and primary development of over CNY50bn per year on a sustained basis, while keeping a strong financial position and recurrent EBITDA/gross interest expense ratio at over 1x, which Fitch views as a remote prospect for the next 18 months Contact: Primary Analyst Andy Chang Associate Director +852 2263 9914 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Lim Su Aik Director +65 6796 7233 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available at Applicable criteria, "Corporate Rating Methodology", dated 5 August 2013, are available at Related Research "Rating Chinese Homebuilders", dated 15 October 2012 Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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