ZHENRO PROPERTIES GROUP LIMITED
Fitch Ratings has downgraded
The senior unsecured ratings have also been downgraded to 'C', from 'B', with a Recovery Ratings of 'RR4'. The ratings have been removed from Rating Watch Negative (RWN).
The downgrade follows Zhenro's announcement that it is seeking consent solicitation relating to its US-dollar perpetual capital securities. The company had previously announced in
If the proposed exchange offer and consent solicitation is successfully completed, the IDR will be downgraded to 'RD' (Restricted Default). Fitch will then reassess Zhenro's credit profile to determine an IDR that is consistent with the company's post-consent solicitation capital structure and risk profile.
Zhenro has not provided further information to Fitch beyond its public announcements.
Key Rating Drivers
Consent Solicitation Constitutes a DDE: Fitch classifies a debt restructuring as a DDE if it results in a material reduction in terms compared with the original contractual terms and conducted to avoid bankruptcy, similar insolvency, intervention proceedings or a traditional payment default.
Solicitation to Avoid Default: Fitch considers the consent solicitation to be necessary for Zhenro to avoid default, as the company's announcement stated that its internal resources may be insufficient to address upcoming debt maturities and the redemption of the perpetual securities in
Material Reduction in Terms: We believe the exchange offer and consent solicitation constitute a material reduction in the terms of the existing notes, as there is an extension in the effective redemption date and distributions are no longer based on the first step-up rate. There is a cash consideration of
Lack of Funding Access: We believe the capital market is largely inaccessible for Zhenro and that it will have to depend on internal cash resources to address its debt servicing, which are increasingly limited. The company has not disclosed to Fitch how much available cash it has on hand for repayment of capital market debt. We expect the company to face increased refinancing pressure on its capital market debt for the next 12 months. Zhenro will need to rely on contracted sales proceeds to address its onshore and offshore capital-market maturities if markets remain shut to the company.
Derivation Summary
Zhenro's ratings are driven by its consent solicitation for its perpetual bond, which Fitch determines as a DDE.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Attributable contracted sales of around
Annual land premium maintained at around two years of land bank life
Gross floor area (GFA) acquired to be 0.5x-1.0x of GFA sold in 2021-2024
Gross profit margin of 16%-19% in 2021-2024.
Key Recovery Rating Assumptions:
4x EBITDA multiple to derive Zhenro's going-concern value
Application of liquidation value approach, as liquidation of the assets would result in a higher return to creditors
We assume a 10% administrative claim in line with criteria.
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of balance-sheet assets that can be realised in sale or liquidation processes conducted during bankruptcy or insolvency proceedings and distributed to creditors.
Advance rate of 80%, raised from 70%, applied to accounts receivable. This treatment is in line with our recovery rating criteria.
Advance rate of 25% applied to the book value of investment properties. The investment property portfolio mainly consists of malls in tier one and two cities. The portfolio has an average rental yield of 1%-2%, which is below the industry average. We consider a 25% advance rate as appropriate, as the implied rental yield on the liquidation value of the investment property portfolio would improve to 5%-6%, which would be considered acceptable in a secondary market transaction.
Advance rate of 50%, lowered from 60%, applied to property, plant and equipment, which mainly consists of hotels and buildings, the value of which is insignificant.
Advance rate of 61% applied to net property inventory. The inventory mainly consists of completed properties held for sales, properties under development (PUD) and deposits for land acquisitions. Different advance rates were applied to the various inventory categories to derive a blended advance rate.
70% advance rate to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory. The company's historical gross margin for development properties is around 20%. Therefore, a higher advance rate of 70% (against the typical 50% in the criteria for inventory) was applied.
55% advance rate to PUD. Unlike completed projects, PUD are more difficult to sell. These assets are also in various stages of completion. A 55% advance rate was applied because Zhenro's PUD are mostly in tier one and two cities. Its land bank life is around two years, so the book value should be reasonably close to market value. The PUD balance - prior to applying the advance rate - is net of margin-adjusted customer deposits.
90% advance rate to deposits for land acquisitions. Land held for development is closer to readily marketable inventory, in a similar way to completed commodity housing units, provided it is well located. Zhenro's land generally is not located in significantly disadvantaged areas. Therefore, a higher advance rate than the typical 50% mentioned in the criteria was considered.
Advance rate of 50%, lowered from 60%, applied to joint venture (JV) net assets. JV assets typically include a combination of completed units, PUD and land bank. A 50% advance rate was applied, in line with the baseline advance rate for inventory.
Advance rate of nil, lowered from 60%, applied to excess cash, after netting the amount of trade payables.
The allocation of value in the liability waterfall results in a Recovery Rating corresponding to 'RR4' for the senior unsecured offshore bonds.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch will reassess Zhenro's capital structure and cash flow after the completion of the consent solicitation, or if the consent solicitation is not completed, to determine its IDR and senior unsecured ratings.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch will downgrade Zhenro's IDR to 'RD' if the consent solicitation is completed or if the company fails to meet any of its debt obligations.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Issuer Profile
Zhenro, listed on the
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Fitch has revised Zhenro's ESG Relevance Score for Financial Transparency to '4' from '3' due to the reversal of its earlier stock-exchange announcement that it was to redeem the perpetual bond in full on
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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