RAM revises outlook on Country Garden’s notes to stable

KUALA LUMPUR (July 12): RAM Rating Services Bhd has revised to stable from negative the outlook on its rating of Country Garden Real Estate Sdn Bhd’s (CGRE) debt notes.

It reaffirmed its AA3(s) rating of the RM1.5 billion nominal value (2015/2035) irredeemable medium term note (IMTN) programme.

In a statement, RAM said the revised outlook reflects the improvement in the credit metrics of CGRE’s ultimate parent, China-based Country Garden Holdings Co Ltd (CGHC), and its expectation that these metrics will be sustained on the back of a strong property sales and solid cash flow generation.

“While we believe the overall Chinese property market will continue to soften in the near term, the group’s sales performance is envisaged to remain sturdy, supporting its robust debt coverage and leverage profile,” added the agency.

CGHC is jointly developing the US$100 billion (RM430 billion) Forest City development on four man-made islands between Johor and Singapore, Central and Danga Bay, both in Johor, and Diamond City in Semenyih, Selangor.

RAM noted that from being China’s third-largest property developer by total sales in 2016, CGHC has moved to first place in 2017, with its sales increasing threefold to 204 billion yuan (RM129 billion) in the first four months of the year.

It added that CGHC’s total debt of 136 billion yuan, which grew because of aggressive land acquisitions, exceeded the rating agency’s expectations in the past two years.

Noting that CGHC plans for a slight increase in land purchases in the next two years, RAM said the move could cause the group to be less flexible in withstanding changes in market conditions, particularly in a softening property market.

“While its leverage is expected to stay manageable under this scenario, we remain cautious in view of its tendency to deviate from its stated plans due to changing market conditions, as exhibited in the past few years,” said RAM.

It also said that although CGHC remains substantially exposed to tier-three and -four cities, making it vulnerable to generally weaker operating environment in those cities, the group is experienced in navigating the markets and strategically selects suitable project locations.

RAM said the IMTN rating reflects unconditional and irrevocable corporate guarantees extended by CGHC, Bright Start Group Ltd and Top Favour Holdings Ltd on a joint and several basis.

“Therefore, the rating mirrors that of CGHC [as the strongest obligor] and its credit fundamentals,” it added.

This article first appeared in The Edge Financial Daily, on July 12, 2017.

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