Yuzhou Group Holdings Company Limited — Moody’s downgrades Yuzhou to Caa2/Caa3; outlook negative

Rating Action: Moody’s downgrades Yuzhou to Caa2/Caa3; outlook negativeGlobal Credit Research – 10 Jan 2022Hong Kong, January 10, 2022 — Moody’s Investors Service has downgraded the corporate family rating (CFR) of Yuzhou Group Holdings Company Limited to Caa2 from B2. At the same time, Moody’s has downgraded the company’s senior unsecured rating on the bonds to Caa3 from B3.The outlook on the ratings remains negative.”The downgrade reflects Yuzhou’s increased refinancing risks driven by its weakened funding access and sizable amount of maturing debt,” says Celine Yang, a Moody’s Vice President and Senior Analyst.”The negative outlook reflects the uncertainty over the company’s ability to mobilize all of its cash to manage its refinancing needs over the next 6-12 months,” adds Yang.RATINGS RATIONALEMoody’s expects Yuzhou’s refinancing risks to heighten as it faces difficulties in raising new funds from onshore and offshore channels to address its maturing debts amid a tight credit environment. In particular, the company has a large amount of onshore and offshore debt maturing by the end of December 2022 — including around USD700 million of offshore bonds and RMB6.5 billion of onshore bond maturing or becoming puttable during the period. In particular, Yuzhou has a total of around USD590 million bonds maturing in January 2022.As of 30 June 2021, the company had unrestricted cash of RMB25 billion, compared with reported short-term debt of RMB15.2 billion. But Moody’s believes there is uncertainty for the company to mobilize all the cash, particularly for the cash holdings at the project and operating companies’ levels, for debt repayment.Moody’s also expects Yuzhou’s contracted sales to decline over the next 6-12 months, driven by weaker homebuyer confidence amid tight funding conditions. This will weaken the company’s operating cash flow and, in turn, its liquidity.Yuzhou’s Caa2 CFR is constrained by its high refinancing risk, weakened liquidity and funding access, as well as its weak credit metrics and high reliance on sales from joint ventures (JVs) and associates, which constrain its corporate transparency and increases uncertainty over its accessibility to the cash at the JV level.Yuzhou’s Caa3 senior unsecured bond rating is one notch below its CFR because of the risk of structural subordination. This subordination risk reflects the fact that most of Yuzhou’s claims are at the operating subsidiaries and have priority over claims at the holding company 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) factors, Moody’s has considered Yuzhou’s concentrated ownership given the controlling shareholder, Mr. Lam Lung On, holds a 58.81{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} stake in the company as of 30 June 2021. Yuzhou had a relatively high dividend payout ratio of 46.8{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} in 2019, compared with 35{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}-36.5{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} in the previous four years.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody’s could downgrade the ratings if Yuzhou’s funding access further weakens or if it defaults on its upcoming maturities.Given the negative outlook, a rating upgrade is unlikely. However, positive rating momentum could develop if the company strengthens its liquidity and significantly improves its operating cash flow.The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Yuzhou Group Holdings Company Limited is a property developer that focuses on residential housing in the Yangtze River Delta and the West Strait Economic Zone. Established in Xiamen in the mid-1990s, Yuzhou is one of the city’s largest developers. The company moved its headquarters to Shanghai in 2016, and launched Shanghai-Shenzhen dual headquarters in 2020.Yuzhou listed its shares on the Hong Kong Stock Exchange in 2009. 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