Fitch Ratings has downgraded the Chinese homebuilder
Fitch has also put all the ratings on Rating Watch Negative (RWN).
The downgrade reflects CCRE's tight liquidity and weak contracted sales in 1H22. Fitch believes that CCRE is likely to repay the
Key Rating Drivers
Tight Liquidity: Fitch expects CCRE's liquidity position to remain tight on weak contracted sales in 1H22. Its unrestricted cash of
Proposed Share and CB Sale: Fitch expects the equity stake sale by the CCRE chairman to
The share sale consideration of
Weak Contracted Sales: Fitch expects CCRE's full-year contracted sales to drop by 30% to around
Leading Position in
Guarantees to Related Parties: CCRE provided a
Derivation Summary
The downgrade of CCRE's ratings to 'B' reflects its weak sales in 1H22 and limited financial flexibility. The RWN reflects our uncertainties on its repayment of the
CCRE has stronger business profile and better liquidity than
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Total contracted sales of
Cash collection rate at 80-90% in 2022-2024;
Gross profit margin of about 15% in 2022-2024;
Annual land acquisition budget to be about 10%-30% of contracted sales proceeds in 2022-2024.
Recovery Rating Assumptions:
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of balance-sheet assets that can be realised in a sale or liquidation process conducted during bankruptcy or insolvency proceedings and distributed to creditors.
Advance rate of 80%, applied to accounts receivable. This treatment is in line with our recovery rating criteria.
Advance rate of 57% applied to the book value of self-owned investment properties. The portfolio has an average rental yield of 3%, which is reasonable. The implied rental yield on the liquidation value for the investment-property portfolio would improve to 6%, which will be considered acceptable in a secondary market transaction.
Advance rate of 50%, applied to property, plant and equipment, which mainly consists of buildings, the value of which is insignificant.
Advance rate of 62%, applied to net property inventory. The inventory mainly consists of completed properties held for sales, and properties under development (PUD), prepayments for land acquisitions. Different advance rates were applied to these different inventory categories to derived the blended advance rates for net inventory.
Advance rate of 70% to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory. The company has historically a gross margin for development property of around 15%. The company also adopts a fast churn strategy, so its book value of inventory should be close to the market value. Therefore, a higher advance rate of 70% (against the typical 50% mentioned in the criteria for inventory) was applied.
Advance rate of 50% to PUD and prepayment for development projects. Unlike completed projects, PUD are more difficult to sell. These assets are also in various stages of completion. A 50% advance rate was applied. The PUD balance - before applying the advance rate - is net of margin adjusted customer deposits.
Advance rate of 90% to deposits for land acquisitions. In a similar way to completed commodity housing units, land held for development is closer to readily marketable inventory. The company has been the leading developer in
Advance rate of 50%, applied to joint-venture (JV) net assets. JV assets typically include a combination of completed units, PUD and land bank. A 50% advance rate was applied in line with the baseline advance rate for inventories.
The allocation of value in the liability waterfall results in a Recovery Rating corresponding to 'RR4' for the offshore senior notes.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The RWN would be removed if the negative sensitivities are avoided, in particular:
Timely repayment of the offshore bonds due in
Completion of the proposed equity transaction resulting in an improved liquidity and capital structure.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to repay the offshore bonds due in
Prolonged delay of the proposed equity transaction;
Deterioration in liquidity, funding access or sales proceeds.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Tight Liquidity: CCRE had unrestricted cash of
Issuer Profile
CCRE, established in 1992, is a leading property developer in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
Entity / Debt
Rating
Recovery
Prior
LT IDR
B
Downgrade
B+
senior unsecured
LT
B
Downgrade
RR4
B+
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