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Jan 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned China-based homebuilder Guangzhou R&F Properties Co. Ltd.’s (R&F; BB/Positive) USD1billion 8.5% senior unsecured notes due 2019 a final rating of ‘BB’.
The notes are issued by its subsidiary, Trillion Chance Limited. R&F has granted a keepwell deed and a deed of equity interest purchase undertaking to ensure that Trillion Chance has sufficient assets and liquidity to meet its debt obligations.
Although the notes issue size has been increased to USD1billion, most of the proceeds will be used to refinance debt that will mature in 2014 and pay general corporate expenses, which does not change R&F’s credit profile and the ratings. The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 6 January 2014.
Superior Margins: Lower land costs and development of commercial projects have yielded stable EBITDA margins of around 35% in the past three years, a level that is at the high end of the range seen at its peers. Fitch expects R&F to maintain the margins for the next two years due to sufficient land bank and low land costs.
National Presence: R&F has a well-balanced nationwide land bank, of which 34% of gross floor area is located in first-tier cities and 63% in second-tier cities. There is no over-concentration in any one city and even Guangzhou, where R&F first established its business, only accounted for less than 25% of contracted sales in 1H13. The diversification helps reduce uncertainties inherent in local policies and local economies.
Sustainable Asset Turnover: The company’s ratio of contracted sales to total debt was more than 1x over the past three years, even though it incurred substantial debt and market conditions were challenging in 2H11 and 1H12. Fitch expects the ratio to improve further in the next two years as the company adds debt at a slower pace and its contracted sales growth accelerates.
Higher Leverage in 2013: R&F’s leverage, as measured by net debt/adjusted inventory, rose to 49% at end-1H13 from 41% at end-2012 and is not expected to have decreased materially in 2013. While sales growth and asset turnover have continued at a healthy pace, the Positive Outlook on the rating may be pressured if R&F’s leverage does not trend down in the next 6-12 months.
Debt Maturing in 2014: There is over CNY12.8bn of the debt maturing in 2014, including CNY8.1bn of bonds and CNY1.4bn of trust loans. Pressure on its short-term liquidity and growth from the impending maturity may be gradually moderated by its diversified funding channels and the newly issued USD1bn offshore notes.
Positive Outlook: R&F’s credit metrics are likely to improve to be commensurate with a ‘BB+’ profile within the next 12 months if the company can refinance debt maturing in 2014 with long-term capital, and improve its asset turnover and leverage.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-Refinancing of bonds and trust loans maturing in 2014 with long-term capital
-EBITDA margin at above 30% on a sustained basis
-Net debt/adjusted inventory sustained below 40%
-Contracted sales/total debt sustained above 1.25x
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Failure to meet the above guidelines over the next 12 months, which would lead to the Outlook being revised to Stable.