Research: Rating Action: Moody’s downgrades Redsun to Caa1/Caa2; outlook remains negative


Hong Kong, June 30, 2022 — Moody’s Investors Service has downgraded Redsun Properties Group Limited’s corporate family rating (CFR) to Caa1 from B3 and the company’s senior unsecured rating to Caa2 from Caa1.

The outlook remains negative.

“The downgrade reflects Redsun’s heightened refinancing risks driven by its weak operating cash flow, weakened liquidity and sizable debt maturities over the next 6-12 months,” says Cedric Lai, a Moody’s Vice President and Senior Analyst.

“The negative outlook reflects the uncertainties over the company’s ability to address its refinancing needs amid a tight funding environment,” adds Lai.

RATINGS RATIONALE

Moody’s expects Redsun’s contracted sales to decline by around 40% year over year in 2022 to RMB55 billion amid weak consumer sentiment and tight funding conditions. The weak contracted sales will reduce the company’s operating cash flow and, in turn, its liquidity. Redsun’s contracted sales significantly fell 61% to RMB15.5 billion in the first five months of 2022 compared with the prior year.

Redsun will have sizable offshore debt maturities, including USD250 million of bonds due in October 2022 and USD455 million in April 2023. Moody’s assesses Redsun’s liquidity to be weak and that the company’s projected operating cash flow and cash on hand will be insufficient to meet all of Its payment obligations over the next 12-18 months, absent any new fundraising amid the tough funding environment.

The company’s investment property portfolio will provide an alternate source of liquidity, as the company could sell some of these properties to meet its debt obligations if needed. However, asset sales are highly uncertain in the current difficult operating environment.

Moody’s forecasts Redsun’s debt leverage, as measured by revenue/adjusted debt, will decline to 55%-60% over the next 12-18 months from 63% in 2021, driven by slower revenue recognition. Similarly, its interest-servicing ability, as measured by EBIT interest coverage, will weaken to 1.5x-1.7x from 1.9x over the same period, by the expected declining margin.

Redsun’s Caa1 CFR reflects the company’s long operating history in developing mass residential properties in Jiangsu province. However, the rating is constrained by the company’s weak liquidity, modest credit metrics and significant exposure to its joint venture (JV) businesses, which increases its contingent liabilities and weakens its corporate transparency.

The Caa2 senior unsecured debt rating is one notch lower than the company’s CFR due to structural subordination risk. This risk reflects the fact that the majority of claims are at the operating subsidiaries and have priority over Redsun’s senior unsecured claims in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the expected recovery rate for claims at the holding company will be lower.

In terms of environmental, social and governance (ESG) considerations, Redsun’s CFR considers the company’s concentrated ownership by its key shareholder, Zeng Huansha, who held a 72% effective stake as of the end of 2021. Moody’s has also considered the presence of three independent nonexecutive directors on Redsun’s seven-member board, and the presence of other internal governance structures and standards as required by the Corporate Governance Code for companies listed on the Hong Kong Stock Exchange.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is unlikely, given the negative outlook.

However, positive rating momentum could emerge if Redsun improves its liquidity and access to funding, and strengthens its sales, profitability and credit metrics over the next 12-18 months.

On the other hand, Moody’s could downgrade Redsun’s ratings if its liquidity deteriorates further.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66220. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Redsun Properties Group Limited was founded in 1996 and listed on the Hong Kong Stock Exchange in July 2018. Its headquarters are in Shanghai and Nanjing.

The company engages in real estate development, commercial properties and hotel operations in China. As of the end of 2021, its saleable resources totaled 18.8 million square meters in gross floor area, spread across over 60 cities in China.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

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The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: NO

b.With Access to Internal Documents: NO

c.With Access to Management: NO

For additional information, please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Moody’s considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody’s. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody’s with information for the purposes of its ratings process. Please refer to https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody’s Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK . Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Cedric Lai
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Franco Leung
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Release Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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