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Fitch Rates Oceanwide's Proposed USD Senior Notes 'B(EXP)'
July 20, 2017 / 9:58 AM / 5 months ago

Fitch Rates Oceanwide's Proposed USD Senior Notes 'B(EXP)'

(The following statement was released by the rating agency) HONG KONG, July 20 (Fitch) Fitch Ratings has assigned China-based property developer Oceanwide Holdings Co. Ltd.'s (B/Stable) proposed US dollar senior notes a 'B(EXP)' expected rating and a Recovery Rating of 'RR4'. The proposed notes, to be issued by Oceanwide Holdings International 2017 Co., Limited, Oceanwide's wholly owned subsidiary, and be guaranteed by Oceanwide, are rated at the same level as Oceanwide's senior unsecured rating because the will represent the company's direct and senior unsecured obligations. The final rating is subject to the receipt of final documentation conforming to information already received. Oceanwide's rating is supported by its strong sales growth and good-quality landbank. The rating is constrained by the rapid increase in leverage, which is likely to remain high for the next 18-24 months as the company ramps up development expenditure to support sales growth and continues to invest in its finance business. KEY RATING DRIVERS Solid Sales Growth: Oceanwide's contracted sales declined 15% in 2016 due to tighter government policies on property. However, its cash collection increased to 132% at end-2016, from 82% at end-2015, because of better collection rates on projects sales. Fitch expects Oceanwide's contracted sales to increase by 10%-15% annually in 2017 and 2018, driven by project launches in Wuhan and sales from new projects in Beijing and Shanghai. This will drive the company's contracted sales to over CNY20 billion and allow it to generate positive operating cash flow from its property business to fund its financial-sector expansion. Continuing Finance Expansion: Oceanwide has been aggressively diversifying its business from pure property development to financial institutions since 2014. It has spent more than CNY20 billion on building its finance business, which includes securities, trusts, insurance and internet finance. We expect Oceanwide to continue investing heavily in the finance sector with an aim to secure licenses for a full range of finance businesses. This will continue to put pressure on its leverage. Leverage Remains High: Oceanwide's leverage, as measured by net debt/adjusted inventory and after deconsolidating debt from the financial business, reached 92% in 2016 (2015: 86.2%), which is higher than that of 'B' rated peers. Fitch expects this ratio to remain above 80% due to Oceanwide's property-development business model, which requires more time to generate sales due to the lengthy primary-land development phase. Oceanwide's consolidated net debt jumped to CNY74 billion at end-2016, from CNY39 billion in 2014, due to higher development expenditure, the rapid expansion of its finance business, additional investment in financial assets and overseas acquisitions. High Quality Landbank: Oceanwide's large landbank, most of which was acquired many years ago, is sufficient for more than 10 years of development. Sites in tier 1 cities like Beijing and Shanghai, affluent tier 2 cities like Wuhan and major cities in the US make up more than 80% of its landbank. Many of Oceanwide's projects in Beijing and Shanghai have prime locations. The low land cost together with the high quality landbank will become the key driver behind a solid EBITDA margin and sustained growth for the next two to three years. DERIVATION SUMMARY Oceanwide has a larger scale in terms of contracted sales and EBITDA than other China-based property companies rated in the 'B' category, such as Redco Properties Group Ltd (B/Stable) and Guorui Properties Limited (B/Stable). However, its leverage is high compared with 'B' category peers partially due to Oceanwide's active investments in financial institutions and larger exposure to commercial development properties that have a longer cash collection cycle. This also drives its lower project churn compared with peers, but Oceanwide's slow-churn business model also means its landbank was acquired years ago, which substantially undervalues its inventory compared with fast-churn homebuilders. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Limited new land acquisitions at 0.1x of contracted sales in terms of gross floor area - Contracted sales growth driven by higher average selling prices of CNY35,000-40,000 per square metre in 2017-2019, from CNY35,608 per square metre in 2016 - Property development gross margin of 45% in 2017-2019, which is lower than in previous years due to higher construction costs - Lower dividend payout ratio than in previous years Recovery rating assumptions - Oceanwide would be liquidated in a bankruptcy because it is an asset-trading company - 10% administrative claim - The value of inventory and other assets can be realised in a reorganisation and distributed to creditors - A haircut of 20% on adjusted inventory, lower than the norm used for peers because of Oceanwide's higher-than-industry profit margin, which implies its inventory will have a higher liquidation value than that of peers - A 20% haircut to investment properties and the net tangible assets of its financial subsidiaries - A 50% haircut to available for sale financial securities as well as land and buildings - We consider Oceanwide's CNY24 billion in available cash, excluding cash of its financial subsidiaries, as excessive, as it significantly exceeds its 2016 contracted sales of CNY12.9 billion. We assume the difference will be spent on development expenditure, for which we have applied a 40% haircut. - Based on our calculation of the adjusted liquidation value after administrative claims, we estimate the recovery rate of the offshore senior unsecured debt to be 42%, which corresponds to a Recovery Rating of 'RR4'. RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: - Contracted sales/net debt, excluding debt attributable to financial institutions, below 0.25x for a sustained period, or a deterioration of this ratio for a sustained period - EBITDA margin below 35% for a sustained period - Substantial weakening of the credit profile of its key financial institutions Positive: Positive rating action is not expected in the next 12-18 months due to Oceanwide's high leverage LIQUIDITY Oceanwide had more than CNY30 billion in cash and CNY2 billion in unused bank-credit facilities as of end-2016, sufficient to cover its short term debt of CNY15.7 billion. In addition, Oceanwide has many financing options, including equity issuance, perpetual capital securities, offshore notes and trust or bank borrowings. Its weighted-average 2016 borrowing cost was 7%-8%. Contact: Primary Analyst Winnie Guo Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of the relevant Rating Committee: 26 July 2016 Summary of Financial Statement Adjustments: Capitalised interest is adjusted for cost of goods sold, as disclosed by the issuer. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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