On November 24th, Fitch downgraded the default rating (IDR) of the long-term foreign currency issuer of China Olympic Garden Group Co., Ltd. (China Aoyuan Group Limited, referred to as "China Olympic Garden", 03883.HK) from "B -" to "CCC-". Fitch also downgraded the senior unsecured rating of the China Olympic Garden and its surviving US dollar senior unsecured notes from "B -" to "CCC-", with a recovery rating of "RR4". Fitch has removed the ratings from the negative rating watch list.
The downgrade is based on the gradual decline in the likelihood that the company will refinance its $688 million public senior note due in January 2022 after China Olympic Park extended the redemption date for its Ultron II asset-backed securities and hired a financial adviser and a legal adviser.
Key rating drivers
The risk of refinancing is high:The refinancing uncertainty of China Olympic Garden's $188 million bonds (due on January 20, 2022) and $500 million bonds (due on January 22, 2022) has increased. The company announced on November 22, 2021 that the holders of its Ultron II asset-backed securities agreed to extend the redemption date of approximately 816 million yuan due on that day. The company also announced that it had engaged financial and legal advisers to assess the group's capital structure, financial position, as well as debt and liquidity.
Limited financial flexibility:As of the first half of 2021, the company had 51.8 billion yuan in available cash, excluding restricted cash and restricted deposits for project construction, but did not provide a cash balance that could be used to repay capital market debt. Fitch believes that most of the cash may be used at the project level, but Fitch cannot verify this from the company. Fitch believes that most of the cash may be at the project level, but Fitch cannot confirm this from the company.
A large number of bonds are about to mature:Fitch estimates that China's Olympic Park has 8.8 billion yuan of public capital market debt maturing or available for sale between now and the end of 2022, including $688 million in senior notes due in January and $200m in June in 2022. In addition, the company holds US $250 million of bonds maturing in September 2022 and RMB 1.5 billion bonds that can be sold back in September 2022.
Limited financing channels:Fitch believes that the financing channels of the Chinese Olympic Garden are limited, and it will have to rely on asset sales or internal cash resources to solve the debt repayment problem. Although China Olympic Park issued 1.8 billion yuan of onshore bonds in July and a HK $399 million share placement in October, the company currently has poor access to capital markets. The company's cash-to-short-term debt ratio is just over double, which may not be enough to cushion the impact of the current volatile market conditions.
Relying on asset sales:Fitch believes it has a way to resolve maturing debt through asset disposals, but these options take time and involve enforcement risks. Auyuan has announced the sale of its Robinson Road project in Hong Kong to a third party for HK $900m in cash, but the amount is small compared to a large number of projects due in the capital markets in 2022. The company is selling other assets, but Fitch believes they will take some time to complete.
Minority shareholders account for a high proportion of equity:In the first half of 2021, the proportion of minority equity (NCI) in the total equity of China Olympic Park rose to 66 per cent, and the ratio of net minority equity payable to net property assets was about 25 per cent. This is a high level among Chinese real estate companies rated by Fitch, suggesting that the Chinese Olympic Garden is likely to lose a lot of cash to minority shareholders.
ESG- governance:The ESG correlation score of Chinese Olympic Garden in terms of financial transparency is "4". In terms of cash levels at the rating entity level, the company appears to be less able to obtain its reported consolidated cash balance compared with previous guidance. This has a negative impact on credit status and is related to ratings and other factors.
Summary of rating derivation
The constraint on China's Olympic Park rating is the increased risk of refinancing its maturing capital market debt, especially at a time of depressed sentiment in the capital markets. Fitch believes that the Chinese Olympic Garden may be able to use its internal cash to repay its maturing debt, which may pose an enforcement risk.
Key rating hypothesis
The key rating assumptions of Fitch in this issuer rating study include:
-2021 equity sales of 105 billion yuan (2020: 98 billion yuan)
-the average annual increase in the cost of land acquisition was 4 per cent between 2021 and 2024
-the unsold land reserve can support sales for a period of about 2.5 years (excluding urban renewal projects)
-sales general management expenses account for 6% of revenue. 8%.
Key recovery rating hypothesis
The recovery rate analysis assumes that if the Chinese Olympic Garden goes bankrupt, it will go through the liquidation procedure.
Deduct 10% of the administrative expenses.
Liquidation method
The liquidation value estimate is based on Fitch's assessment of the value of assets in the balance sheet that can be sold or liquidated in bankruptcy proceedings and distributed to creditors.
-30% discount rate for accounts receivable
-given that the rental yield is close to 2%, a 70% discount rate is applicable to investment properties.
-40% discount rate for land and buildings
-40% discount rate for adjusted net inventory
-China Olympic Garden has more cash available than its trade payables; Fitch applies a 40% discount on cash remaining after deducting three-month contract sales.
-the corresponding recovery rating obtained from the debt value distribution of China Olympic Garden senior unsecured foreign bonds according to the repayment order is "RR4".
Rating sensitivity
Factors that may alone or jointly lead to positive rating actions / upgrades by Fitch include:
-the bond repayment plan due in January 2022 has been confirmed and significant progress has been made in asset disposal.
Factors that may alone or jointly cause Fitch to take negative rating action / downgrade include:
-liquidity deteriorated further.
-failure to pay interest or inability to repay bonds maturing in January 2022.
Liquidity and debt structure
A large amount of debt is about to mature:As of the first half of 2021, the Chinese Olympic Garden held 51.8 billion yuan in available cash (excluding restricted cash and restricted deposits for project construction), enough to cover its short-term debt of 51.6 billion yuan. However, Fitch predicts that the Chinese Olympic Garden will not be able to use the full amount of reported cash to repay its debts. The last capital market debt payable by the Chinese Olympic Garden was $688 million in bonds maturing in January 2022. Since then, China's Olympic Park has $200 million in bonds facing a resale in June 2022.
Brief introduction of issuer
China Olympic Garden is one of the top 30 real estate developers in China. By the end of 2020, the company had about 370 projects with a total floor area of about 57 million square meters. Guangdong Province accounts for 28% of the land storage floor area of the Olympic Garden in China. In addition, the China Olympic Park also owns a number of properties in Canada and Australia.