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Jan 27 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned China Overseas Grand Oceans Group Ltd (COGO) USD400m senior guaranteed 5.125% notes a final rating of a€˜BBBa€™.
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 18 November 2013.
The Chinese homebuilder’s proposed bonds are rated at the same level as COGO’s senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.
COGOa€™s rating is based on a top-down approach; it is one notch down from its parent China Overseas Land & Investment Limited (COLI; BBB+). The standalone profile of COGO is in the a€˜BBa€™ rating category.
Benefits and Support from parent: COLI, one of the largest and most profitable homebuilders in China, is the major shareholder of COGO with a 38% stake. COLI focuses on Tier 1 and 2 cities whereas COGO focuses on Tier 3 cities. COGO is of long-term strategic importance to COLI as it is the only entity through which the group is expanding in Tier 3 cities. The two companies are integrated, sharing senior and operational management as well as brand names, market intelligence and management systems.
Focus on Tier 3 Cities: Tier 3 cities are regional economic centres or cities with strong growth potential. Continued urbanisation will support COGOa€™s growth in these cities. The GDP of the Tier 3 cities that COGO operates in is expected to expand by 12% in 2013, compared with the 7.5% growth for the whole of China. COGO commanded the top position in sales in five Tier 3 cities in 1H13.
Nevertheless, COGOa€™s standalone a€˜BBa€™ credit profile is limited by its relatively small scale, short track record of around three years in Tier 3 cities and weaker margins reflecting the low average selling price (ASP) in Tier 3 cities.
Strong Execution Capabilities: Since 2010, COLI has transferred more than 142 professionals to COGO to improve the operational and execution capabilities of the subsidiary. COGO has demonstrated strong execution and asset turnover, with the ratio of contracted sales to total debt at 1.9x in 2011 and 2012. Fitch expects COGO to continue this trend in the medium term. COGOa€™s operational model is to start construction in 100 days and start pre-sales in 200 days, and in the past three years, it has managed to sell 86.5% of its projects by the time they are completed.
Capital Structure Improvement: COGOa€™s funding costs decreased from 5.66% in December 2010 to 4.70% in 1H13. With the help of its parent, COGO has established strategic partnerships with major commercial banks that ensure COGO will have access to sufficient credit facilities. COGO also coordinates with COLI on its treasury functions and shares both domestic and offshore banking relationships with COLI.
Strong Brand Name: a€œChina Overseas Propertya€� has nearly 30 years of history and has been a leading brand in the industry. In cities where COGO operates, the brand premium gives it a 6%-20% boost in its average selling prices compared with similar products in the area. COGO can also use the China Overseas Property Club of customers who have previously purchased its homes to broaden its customer network, enhance current customer relationships, and develop a mid- and high-end client base.
Positive rating action is unlikely without evidence of stronger contractual linkage between COLI and COGO.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Weakening of strategic, operational or ownership linkages between COLI and COGO
- Lack of support from COLI in the event of sustained weakening of COGOa€™s operational, financial and liquidity positions
- Negative rating action on COLI