Research: Rating Action: Moody’s downgrades Powerlong’s ratings to Caa2/Caa3; outlook remains negative


Hong Kong, July 05, 2022 — Moody’s Investors Service has downgraded Powerlong Real Estate Holdings Limited’s corporate family rating to Caa2 from Caa1 and senior unsecured rating to Caa3 from Caa2.

The outlook remains negative.

“The rating downgrades reflects Powerlong’s heightened liquidity risk following its proposed exchange offer and consent solicitation to its noteholders,” says Cedric Lai, a Moody’s Vice President and Senior Analyst.

“The negative outlook reflects the uncertainty over the company’s ability to address its near-term debt maturities amid challenging funding conditions,” adds Lai.

RATINGS RATIONALE

On 4 July 2022, Powerlong announced an exchange offer and consent solicitation to its bondholders for the company’s USD senior notes due in July 2022 and November 2022 [1].

The proposed exchange offer indicates Powerlong’s liquidity stress amid a difficult operating environment, tight funding conditions and the company’s large debt maturities, including a total of USD600 million offshore bonds due before the end of December 2022. The company also has USD420 million of offshore bonds and onshore bonds of RMB9.4 billion maturing or becoming puttable before the end of 2023.

Powerlong’s Caa2 CFR reflects the company’s weak liquidity, and Moody’s expectation that the company will face difficulties in raising new funds from onshore and offshore bond markets to address its refinancing needs due to the constrained funding conditions.

Although Powerlong’s investment property portfolio could provide an alternate source of liquidity, such asset sales would be subject to the volatile market conditions.

The Caa3 senior unsecured debt rating is one notch lower than Powerlong’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 Powerlong’s senior unsecured claims in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the likely recovery rate for claims at the holding company will be lower.

In terms of environmental, social and governance (ESG) factors, Moody’s has considered the company’s concentrated ownership in its controlling shareholders, Hoi Kin Hong and Hoi Wa Fong, who together held a 59% stake in the company as of 31 December 2021. has also considered the oversight of the company’s special committees, of which its audit and remuneration committees are chaired by two independent nonexecutive directors; and the application of the Listing Rules of the Hong Kong Stock Exchange and the Securities and Futures Commission Ordinance in Hong Kong SAR, China to oversee related-party transactions.

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

An upgrade is not given the negative outlook.

However, positive rating momentum could emerge if Powerlong improves its operating cash flow, funding access and materially reduces its refinancing risks.

On the other hand, Moody’s could downgrade the rating if the company’s liquidity and refinancing risks heighten, or if the recovery prospects for its creditors deteriorate.

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.

Powerlong Real Estate Holdings Limited is a Chinese property developer focused on building large-scale integrated residential and commercial properties in China. The company, which is 59% owned by the founding Hoi family as of 31 December 2021, listed on the Hong Kong Exchange in October 2009.

As of 31 December 2021, Powerlong’s land bank for development totaled around 36.5 million square meters in gross floor area under development and for future development.

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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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.

REFERENCES/CITATIONS

[1] Powerlong’s announcement on Stock Exchange of Hong Kong 4-Jul-2022

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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