(The following was released by the rating agency)
-- Higher debt and weaker margins will keep Kaisa’s financial risk profile weak for the rating category.
-- We are revising the rating outlook on the China-based property developer to negative from stable.
-- We are affirming the ‘B+’ long-term corporate credit rating on the company.
-- We are raising the issue rating on Kaisa’s existing senior unsecured notes to ‘B+’ from ‘B’.
On March 20, 2012, Standard & Poor’s Ratings Services revised the rating outlook on China-based real estate developer Kaisa Group Holdings Ltd. to negative from stable. We also affirmed the ‘B+’ long-term corporate credit rating and lowered the Greater China credit scale rating on the company to ‘cnBB-’ from ‘cnBB’. At the same time, we raised the issue rating on Kaisa’s existing outstanding senior notes to ‘B+’ from ‘B’ and affirmed the ‘cnBB-’ Greater China credit scale rating on the notes.
We revised the outlook to reflect our view that Kaisa’s financial strength will remain weak, as reflected in deteriorating credit ratios in 2011, due to higher borrowings and weaker-than-expected development margins. At the end of 2011, Kaisa’s debt-to-EBITDA ratio and EBITDA interest coverage both breached our downgrade triggers of 5.0x and 2.5x, respectively. Nevertheless, in our base-case scenario, we expect the company’s credit ratios to improve in 2012, despite a weaker operating environment.
We believe Kaisa will move further from the downgrade triggers this year because we expect it to recognize revenue from the delivery of properties sold in 2011, which increased 51% year over year. We expect Kaisa’s EBITDA margins to hover around 24% in 2012 compared with about 21% in 2011, and the company to reduce its land acquisitions and other expenses to maintain its borrowings at the same level as at the end of 2011.
In our base-case scenario, Kaisa’s adjusted debt-to-EBITDA ratio will be modestly above 5x and EBITDA interest coverage ratio will be slightly above 2x in 2012. These ratios could deteriorate if property sales for 2012 decline from our base case of about Chinese renmnibi (RMB) 15 billion.
In our view, Kaisa’s significantly increased leverage and higher interest expenses on its bonds will likely pressure cash flows if property sales slip. The deepening correction in the Chinese property market has increased this risk. We expect home purchase restrictions to affect the sale of key projects for 2012, such as an urban redevelopment project in Shenzhen. In the first two months of 2012, Kaisa’s contract sales were RMB1.61 billion, or 9.7% of its full-year 2012 target. Contract sales were RMB15.29 billion in 2011, partly due to the company’s aggressive pricing.
Kaisa’s EBITDA margin for 2011 was materially lower than for 2010 due to a shift in the company’s project mix toward projects outside its home market. We believe Kaisa’s EBITDA margin will recover somewhat in 2012, but far from the level in 2010. We expect pricing for new launches to reflect the deteriorated market sentiment and increased price discounting from competitors.
We view Kaisa’s large and low-cost land bank and its established market position in Shenzhen as rating strengths. The company has made some progress in securing urban redevelopment projects in Shenzhen and Guangdong. These projects have lower capital intensity and higher profit margins than its other projects.
We raised the issue rating by one notch because the company has improved its debt structure by reducing the structural subordination risk on its offshore debt. We expect the company to maintain its priority debt to below 15% of total assets in 2012. The ratio was below this threshold in 2010 and 2011.
Kaisa’s liquidity is “adequate”, as defined under our criteria. The company’s debt issues in the past 12 months have extended its debt maturity profile. It has limited refinancing needs in the next one year, although we note the large bunching of maturities in 2014-2015. Kaisa’s liquidity is sensitive to property sales.
We estimate that Kaisa’s liquidity sources will exceed uses by about 1.2x in 2012 based on the following major assumptions:
-- We expect the company to receive about RMB15 billion-RMB16 billion in cash from property sales in 2012.
-- Kaisa had an unrestricted cash balance of RMB3.9 billion at the end of 2011.
-- We expect the company’s cash uses for 2012 to include RMB5 billion-RMB6 billion on construction, RMB3.2 billion on capital expenditure, RMB1.4 billion in interest expenses, and RMB2.1 billion for the repayment of onshore loans.
We understand that Kaisa has about RMB1.50 billion in undrawn and uncommitted bank lines as of the end of 2011. Nevertheless, the company’s capacity to incur new debt is limited, as it had breached certain incurrence financial covenant on its offshore bond.
The negative outlook reflects the weak outlook for Kaisa’s property sales and margins, which will continue to undermine the company’s business and financial risk profiles. We expect Kaisa’s credit ratios to remain somewhat weak and may not improve to levels we expect for the current rating.
We may lower the rating if Kaisa’s property sales or margins are materially lower than our projections and the company’s borrowings increased materially further, such that its contract sales are less than RMB15 billion in 2012 and EBITDA interest coverage is below 2.5x.
We could revise the outlook to stable if Kaisa shows good execution of its property sales in a difficult operating environment and stabilizes its leverage and cash flow coverage. This could happen if the company’s property sales are at least RMB16.5 billion, its EBITDA margin is above 25%, and its debt-to-EBITDA ratio stays below 5x in 2012.