(The following was released by the rating agency)
SINGAPORE, January 11 (Fitch) Fitch Ratings has assigned China-based Yuexiu Property Company Limited (YXP) a Long-Term Issuer Default Rating (IDR) of ‘BBB-’ with Stable Outlook and a senior unsecured debt rating of ‘BBB-'.
Fitch has also assigned YXP’s USD medium-term notes programme a ‘BBB-’ rating and its proposed senior unsecured USD notes issued under the programme an expected ‘BBB-(EXP)’ rating. The final rating is contingent on the receipt of final documents conforming to information already received.
YXP’s ratings benefit from a one-notch uplift from its moderately strong linkage with the state-owned Assets Supervision and Administration Commission (SASAC) of Guangzhou Municipal People’s Government. YXP is the largest Guangzhou SASAC-owned enterprise by total assets and has been closely involved in the municipality’s urban redevelopment projects.
YXP’s standalone credit profile of ‘BB+’ is supported by its strong track record in property development, adequate recurring EBITDA (CNY490m in 2011) and the additional financial flexibility provided by its 36%-owned Yuexiu REIT. YXP’s development of landmark property projects such as Guangzhou IFC has helped the company win similar projects in other major cities. Recurring EBITDA/interest expenses was 0.41x in 2011, which Fitch expects to gradually improve as YXP’s and Yuexiu REIT’s investment property portfolios grow more meaningfully by 2017.
Its REIT platform has enabled YXP to monetise its investment property portfolio while still retaining the benefits of recurring income and capital appreciation derived from its grade-A city centre offices and commercial buildings. YXP is also the only Chinese property with a REIT unit. Furthermore, Yuexiu REIT is able to raise its own equity funding, providing YXP with an additional channel of financing for investment property development.
The rating is constrained by a lack of scale to support YXP’s highly diversified business in terms of the number of projects and geographical market. The rating is also held back by its moderate leverage, as measured by net debt/net inventory, of above 0.4x. YXP’s expansion beyond Guangzhou from 2009 partly drove the rapid increase in its net debt to CNY17bn in 2011 from CNY6.6bn in 2008, taking leverage to 0.42x from 0.36x during the same period. Fitch expects further debt to be raised to fund the enlarged area of projects under development - totalling 5.6 million square metre (sqm) as of end-H112 compared with 2.2 million sqm in 2008. This will continue to keep leverage above 0.4x over the next two to three years.
Positive: Future developments that may, individually or collectively, lead to Positive rating action include:
- evidence of stronger linkage with the Guangzhou government
- recurring EBITDA/interest above 1.0x together with recurring EBITDA above CNY1bn
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- weakened linkage with the Guangzhou government
- weakened financial profile of its parent Guangzhou Yuexiu Group Limited leading to YXP having to provide support to its parent
- net debt/adjusted inventory (not including REIT assets) exceeding 0.45x
- deterioration in its recurring EBITDA/interest to below 0.5x