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April 4 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned property developer Beijing Capital Land Ltd's (BCL; BB+/Negative) private placement of CNY1bn 5.75% guaranteed notes due 2017 a final 'BB+' rating, following the issuance of the notes denominated in offshore yuan, or CNH. The notes are issued under its USD1bn guaranteed medium-term note and perpetual securities programme and will be consolidated with the CNY2bn 5.75% guaranteed notes due 2017 issued on 17 February 2014 to form a single series.
The offshore yuan notes are issued by Central Plaza Development Ltd and are rated at the same level as BCL's senior unsecured rating because they will be irrevocably and unconditionally guaranteed by BCL's wholly owned subsidiary International Financial Center Property Ltd. Under the terms of the programme, BCL has granted a keepwell deed and deed of equity interest purchase undertaking for the offshore yuan notes.
The final rating is in line with the expected rating assigned on 30 March 2014.
Leverage Moderated But Volatile: BCL's leverage, measured by the net debt/adjusted inventory ratio, moderated to 36% in 2013 from 47% in 2012, helped by a strong increase in development sales in the last two months of 2013. The sharp increase in investment property assets (a total of CNY3.5bn in 1H13 and 2012) reversed in 2H13 following asset disposals. BCL's intention to grow at a faster pace, which will require continued increase in land and construction expenditure, is likely to result in more volatile leverage. To achieve faster growth without increasing pressure on its credit metrics, BCL needs to sustain an improvement in contracted sales above the 2013 level of CNY19.6bn.
Contracted Sales Outlook Uncertain: Contracted sales in 2013 were volatile - they increased by only 14% yoy in January-October, but surged 160% yoy in November-December. Strong reliance on sales in Beijing and Tianjin (60% of total sales in 2013, 41% in 2012) could result in lumpy sales and reduced cash-flow visibility. Furthermore, sales uncertainty could increase with the tightening of home-purchase restrictions in Tier 1 cities and intense competition for land. However, Fitch believes that BCL's fast-churn mass-market business model targets the right market.
Investment Property Contribution Weak: Because of the long gestation period for investment properties, they do not yet contribute meaningfully to BCL's earnings. In addition, its outlet malls will likely take significantly longer to stabilise and achieve profitable yields. These factors have resulted in a reduced focus by BCL in the expansion of its investment property business. As a result, the ratio of recurring rental EBITDA to interest expense will remain negligible over the next two to three years.
Sufficient Liquidity: BCL had CNY11.3bn cash and RMB65.6bn in unused bank credit facilities. Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2013-15 due to its diversified funding channels from both onshore and offshore capital markets, strong support from its partners China Development Bank and Singaporean government investment company GIC Private Limited, and its flexible land acquisition strategy.
Benefits from Parent and Partners: BCL is 45.58%-owned by Beijing Capital Group Ltd, which has acquired a low-cost land bank in prime locations throughout China through local infrastructure development with local governments. Beijing Capital Group's land-incubation strategy provides land bank resources for BCL at a low cost. In addition, BCL's partnership with GIC and China Development Bank since 2003 has produced additional funding channels and liquidity.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net debt/adjusted inventory leverage remaining above 40% over the next 12-18 months
- Monthly contracted sales in 2014 consistently increasing at less than 20% yoy
- EBITDA margins (adjusted for capitalised interest) falling below 25% (28.8% at end-June 2013)
- Any signs of increase in net debt to fund additional investment property expansion in the next 12-18 months
- Any signs of weakening in Beijing Capital Group's land incubation strategy and/or weaker ties with its strategic partners
Positive rating action in the immediate future is unlikely given BCL is on Negative Outlook, although the Outlook may revert to Stable if BCL's performance and leverage ratios improve to sit more comfortably within thresholds that, if reached, may trigger negative rating action.