Franshion Rates China-based Franshion's USD Notes Final 'BBB-'

Wed Mar 19, 2014 9:31pm EDT

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(The following statement was released by the rating agency) HONG KONG/SINGAPORE, March 19 (Fitch) Fitch Ratings has assigned China-based homebuilder Franshion Properties (China) Limited's (Franshion; BBB-/Stable) USD500m 5.75% senior unsecured notes due 2019 a final rating of 'BBB-'. The notes will be issued by Franshion Brilliant Ltd., a wholly owned subsidiary of Franshion. The notes are rated at the same level as Franshion's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. Separately, Franshion on 10 March 2014 said it is considering a possible spin-off and IPO of its hotel business. The proposal is still at an early stage, but a successful spin-off would provide Franshion with more financing options and unlock liquidity of its hotel portfolio. The proceeds from the IPO would provide more liquidity and improve its leverage ratio. Although Franshion intends to retain majority control of the hotel operation after the spin-off, Fitch may consider deconsolidating the operation in its analysis if there is clear ring-fencing of the hotel operations. Franshion intends to add more than 800,000 sqm in gross floor area (GFA) of investment property assets between 2013 and 2016 to the 510,000 sqm of investment properties at end-2012, which will drive continued growth in rental EBITDA. The spin-off of the hotel operation will support Franshion's continued capex in investment properties while helping it to maintain a stable credit profile. If Franshion proceeds with the spin-off and IPO, Fitch will release more details of its analysis, which will include a review of the factors affecting its rating sensitivities. KEY RATING DRIVERS Significant Expansion in Development: Franshion's sales from property development rose 36% to CNY14.6bn in 2013, significantly ramping up its business scale. The company had initial success at its land development project at Meixi Lake in Changsha, the capital of Hunan province, which is reflected in total land sales of CNY6.4bn in 2013 at an average selling price of CNY3,012 per sqm versus around CNY1,500 per sqm of cost for construction and relocation of the original occupants. Fitch believes Franshion will continue to actively develop property and land to achieve sales growth of around 30% in 2014. Stable Recurring Income: Growth in recurring income was subdued, rising to HKD3.3bn in 2013 from HKD3.1bn in 2012. Rentals from investment property rose 13% while revenue from its hotel business increased 3%. Over the next 18 months, Fitch expects Franshion's property development business to continue growing at a faster pace than its investment property and hotels operation, which would result in higher borrowings and a drag on the ratio of recurring EBITDA to interest coverage significantly below 1.0x. 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. Substantial Financial Flexibility: Given the expected sales performance, abundant cash balance at end-2013, and estimated capex for future development, Fitch expects Franshion to have sufficient liquidity for operation and further expansion in 2014. Its close relationship with domestic banks, which results in cheaper funding cost, and its strong asset pool, which can be pledged if necessary, provides substantial financial flexibility to support the ratings. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Net debt/adjusted inventory excluding revaluation adjustment of investment property remaining above 45% on a sustained basis -Recurrent EBITDA/gross interest expense ratio falling below 1.0x on a sustained basis (Fitch's 2013 estimate: 0.7x-0.8x) -Reduced ties with state-owned majority stakeholder Sinochem Group, including a reduction in Sinochem Group's equity stake in Franshion to under 51% from 62.87% as at end-2013, 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 (end-2013: CNY25bn), while maintaining recurrent EBITDA/gross interest expense above 2.5x -Sales from project development and primary land development reaching over CNY50bn (2013: CNY21bn) per year on a sustained basis, while keeping a strong financial position and recurrent EBITDA/gross interest expense ratio at over 1.0x, 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: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, "Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 5 August 2013 are available at www.fitchratings.com 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 Rating Chinese Homebuilders here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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