S&P Global Ratings downgraded Country Garden on Monday after China’s top developer’s business performance by sales fell short of expectations and raised doubts about the group’s liquidity in the coming years.
S&P downgraded its long-term issuer credit rating on Country Garden by one notch to BB, with a negative outlook reflecting the risk that the company’s liquidity buffer and leverage could deteriorate further amid weaker sales and strong construction spending.
The agency expects the Guangdong-based carmaker’s consolidated debt-to-EBITDA ratio to decline from 3.7 in 2021 to 5.2 in 2022 and 2023, due to lower revenue due to the slowdown in sales.
“Despite Country Garden’s efforts to reduce debt, we believe weaker EBITDA will outweigh debt reduction,” S&P said in a statement. “We have therefore revised our assessment of the company’s financial risk profile from aggressive to significant.”
Ample cash reserve
According to S&P, a factor mitigating Country Garden’s liquidity risk is an adequate cash reserve. The company had 77 billion RMB ($11 billion) in unrestricted liquidity at the end of June – up from 97 billion RMB at the end of 2021, but sufficient to cover short-term maturities of 73 billion RMB, including 45 billion RMB in bank loans.
“In our view, Country Garden’s unrestricted cash remains strong as it has good banking relationships and a good collection rate of over 90%,” the agency said. “This despite the fact that most Country Garden projects are located in lower-tier cities where escrow account policies may be stricter following the national mortgage boycott in July.”
Another lifeline for the company chaired by Yang Guoqiang is its onshore financing capabilities. In May, Country Garden was one of the few private developers asked by the Chinese government to issue a 500 million RMB onshore corporate bond backed by credit default swaps.
On Tuesday, Country Garden announced the issuance of an onshore medium-term note of up to RMB 1.5 billion, fully guaranteed by state-owned China Bond Insurance.
Either way, S&P could downgrade its rating further if Country Garden’s debt-to-EBITDA ratio approaches 6 for an extended period, or if its EBITDA-to-interest ratio falls below 3 for a similar period, it said. said the agency.
The crisis is hitting incomes
With China’s real estate crisis showing no signs of a turnaround despite a series of stimulus measures, Country Garden has seen sales decline in its projects. For the month of August, the developer’s contract sales totaled RMB 28.9 billion, down 36% from the prior year period.
“We may revise the outlook to stable if Country Garden sales improve over the next 12 months,” S&P said.
New home prices in 70 Chinese cities fell 0.3 percent in August on a monthly basis after stabilizing in June and July, official government statistics showed.
Meanwhile, investment in real estate development plunged 7.3% year-on-year to RMB 9 billion in the January-August period, with residential investment down 6.9% to 6.9 billion RMB.