RPT-Fitch Rates Franshion's USD Notes 'BBB-'
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Oct 10 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned China-based homebuilder Franshion Properties (China) Limited's (Franshion, 'BBB-'/Stable) USD300m 5.375% senior unsecured notes due 2018 a rating of 'BBB-'.
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-to-interest 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 position: 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.
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:
-Increasing 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
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