(The following was released by the rating agency)
-- We believe that Renhe’s liquidity could deteriorate more than we expected following the company’s guidance that its property sales will be significantly lower in 2012.
-- Limited bank funding in a tight credit environment constrains the liquidity and sales of the Chinese shopping mall developer and operator, in our opinion. -- We are lowering our long-term corporate credit rating on Renhe and the rating on its senior unsecured notes to ‘B’ from ‘B+'.
-- We are placing all the ratings on CreditWatch with negative implications.
On March 29, 2012, Standard & Poor’s Ratings Services lowered its long-term corporate credit rating and the issue rating on Renhe Commercial Holdings Co. Ltd. to ‘B’ from ‘B+'. At the same time, we placed all the ratings, including our ‘cnBB-’ Greater China scale credit ratings on Renhe and its senior unsecured notes, on CreditWatch with negative implications. Renhe is a China-based underground shopping mall developer and operator.
We lowered the ratings because Renhe’s property sales and liquidity could weaken significantly more than we expected in 2012. Our view reflects the company’s announcement with the release of its 2011 results that it targets property sales for this year of Chinese renminbi (RMB) 3.0 billion-RMB4.0 billion, which is 50% lower than our base case. We also expect much lower cash collection than we previously anticipated for 2012, due to canceled property sales in 2011. In our opinion, the company has limited funding channels to restore its financial strength against a weak property sales outlook.
We believe that Renhe’s business model is vulnerable to tight credit conditions, the company’s limited access to bank borrowings, and generally anemic investment demand. Renhe doesn’t hold land use rights on the underground commercial properties that it develops. Because of this, the company has not received meaningful onshore bank credit to fund the construction of its projects. Further, it provides guarantees to banks for buyers to obtain loans to purchase its properties.
We placed the ratings on CreditWatch because we believe Renhe’s liquidity could deteriorate to “weak” from “less than adequate”, as defined in our criteria, in 2012. The company canceled presales of RMB3 billion at its project in Humen, Dongguan last year. This reduced its 2011 presales to RMB4.0 billion--about 50% lower than our expectation. In addition, Renhe’s collection period for sales proceeds has increased significantly due to tight bank credit. The company also has limited flexibility to scale back construction spending on presold but incomplete projects.
In our view, Renhe’s liquidity is “less than adequate”. We expect the company’s liquidity sources to cover its uses by about 1.0x in 2012. However, its liquidity is highly sensitive to property sales, cash collection, and construction spending. The company’s receivables that are more than six months past due increased to RMB1,224.7 million at the end of 2011, from RMB12.5 million a year earlier. Renhe has short-term onshore debt of RMB555.3 million and interest expenses of about RMB800 million (on both its offshore notes and onshore debt) due in 2012.
We aim to resolve the CreditWatch action within the next three months. We may lower the rating on Renhe by at least one notch if we assess that the company’s liquidity will deteriorate to “weak”. This means that the company’s sources of liquidity will be lower than its uses over the next 12 months.
Related Criteria And Research
-- Renhe Commercial Holdings Co. Ltd. Ratings Lowered To ‘B+’ From ‘BB-’ Due To Weakening Liquidity; Outlook Is Negative, March 15, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Rating Factors For Chinese Real Estate Developers, June 2, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Downgraded; CreditWatch/Outlook Action
Renhe Commercial Holdings Co. Ltd.
Corporate Credit Rating B/Watch Neg/-- B+/Negative/--
cnBB-/Watch Neg/-- cnBB-/--/--
Senior Unsecured ( B/Watch Neg B+
cnBB-/Watch Neg cnBB-