Moody's Downgrades Evergrande on Highly Acquisitive Appetite

  • Ratings company cuts corporate family rating one notch to B2
  • Evergrande plans to issue 8% dollar bonds to refinance debt

Evergrande Real Estate Group Ltd., a Chinese developer that’s been on a buying spree this past year, had its ratings cut by Moody’s Investors Service after the builder announced a plan to issue dollar bonds.

Moody’s downgraded Evergrande’s corporate family rating by one notch to B2, as the latest fundraising increased the builder’s financial risk due to a “highly acquisitive appetite and debt-funded strategy for acquisitions,” the ratings company said in an e-mailed statement on Monday. Evergrande is planning to issue 8 percent dollar bonds due in 2019 to refinance existing debt and to replenish general working capital, it said in a Hong Kong stock exchange filing on Monday.

Chinese developers are facing a raft of headwinds this year, as authorities seek to prop up a weakening yuan and a glut of supply has slowed the sales recovery. While Evergrande recorded strong sales of 201 billion yuan ($34 billion) last year, its high interest payments and expenses have dragged down its profitability, Hong Kong-based Jenny Huang of Fitch Ratings wrote in note on Monday. Very little of the 30 percent gross margin from Evergrande’s home sales is left to support the expansion, Huang added.

The company’s $1.5 billion notes due in 2018, with a coupon of 8.75 percent, fell 0.75 cents to 101.2 cents on the dollar, the biggest drop since Jan. 1. The shares fell 5.3 percent to HK$5.78 as of 2:52 p.m. in Hong Kong.

Active Buyer

Evergrande, majority-owned by billionaire chairman Hui Ka Yan, was the most active buyer among listed developers last year after accounting for more than one-quarter of $25 billion in transactions, according to data compiled by Bloomberg. Last month, Evergrande agreed to buy 13.5 billion yuan of assets from New World China Land Ltd. In the past year, Evergrande also paid a record price for the Mass Mutual Tower in Hong Kong and bought a stake in an insurance venture.

Its acquisitions are “highly aggressive,” Moody’s Hong Kong-based analyst Franco Leung wrote in the statement. The purchases raise the company’s business risk when China’s property market remains challenging due to an oversupply in lower-tier cities.

“The company is a huge animal now with a lot of business segments in addition to its already-huge property business,” said Zhi Wei Feng, a credit analyst at Standard Chartered Plc in Singapore. “The key risk is its debt-funded acquisition appetite. If the property market starts to turn against them, the company’s liquidity will be tested given its large debt obligations especially as they have lots of debt with short-term repayment structures.”

In the past year and half, Chinese builders, traditionally a big source of dollar-bond issuance, have been turning to the local market to issue notes. They sold $72 billion of domestic debentures in 2015, compared with just $11 billion in dollar bonds, reversing a previous reliance on overseas funding, according to a Monday report by Bloomberg Intelligence. The onshore credit market “will probably be increasingly favored to avoid forex risks from greater yuan volatility,” the report said.

— With assistance by Lianting Tu, and Emma Dong

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