Fitch Ratings has downgraded China-based property developer CIFI Holdings (Group) Co. Ltd.'s Long-Term Foreign- and Local-Currency Issuer Default Ratings to 'CC' from 'BB-'.

Fitch has also downgraded CIFI's senior unsecured rating and the ratings on the outstanding notes to 'CC' with a Recovery Rating of 'RR4', from 'BB-'. All the ratings have been removed from Rating Watch Negative.

The downgrade reflects CIFI's rising liquidity risks, amid market reports that it failed to make an interest payment for its convertible bonds (maturing 8 April 2025) that was due in early October, and that it was also seeking to delay certain principal and interest payment for other financial obligations.

The company has declined to comment to Fitch in writing, and has not provided further information to Fitch beyond its public announcement. Fitch has been unable to verify the non-payments.

Key Rating Drivers

Uncertainty in Timely Debt Servicing: CIFI has not made any public statements in response to market reports about the alleged missed payment. The bond has no grace period, and any missed payment could constitute an event of default. There are further news reports claiming CIFI has proposed to delay payment of certain offshore bank loan interest and amortized principal. Fitch has been unable to verify the accuracy of these news.

Heightened Liquidity Risk: We believe the company may not be able to access the capital market in the medium term, and expect it to rely on cash on hand and internal cash flow to address upcoming maturities in the rest of 2022 and 2023. We estimate CIFI has to address around CNY20 billion of capital-market maturities and offshore syndicated loans during 2023.

CIFI stated on 28 September 2022 that it had more than CNY30 billion in cash, based on an unaudited estimate. The majority of the cash relates to the group's property development projects, including restricted presale proceeds deposited in designated bank accounts. Fitch believes the bulk of CIFI's cash may not be readily available for debt servicing.

Weak Contracted Sales: CIFI's total contracted sales fell by 47% yoy in 8M22 to CNY94.3 billion, and we believe recovery remains uncertain in the near term. Poor sales will continue to hamper cash flow generation.

In accordance with Fitch's policies, the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different from the original Rating Committee outcome.

ESG - Group Structure: CIFI has high exposure in joint ventures (JVs) and associates, which appear to have weaker liquidity or funding access. This has led to material cash outflow over the past year and could weaken financial flexibility further.

ESG - Financial Transparency: The company entered into non-standard financial arrangement with minority shareholders that may lead to previously undisclosed scheduled cash outflow.

Derivation Summary

CIFI's ratings reflect the increasing liquidity risks amid market reports that it has failed to service its debt obligations in a timely manner.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Attributable contracted sales to drop by 35% in 2022 (2021: 7% increase);

Minimal land acquisitions in the rest of 2022 and 2023.

Key Recovery Rating Assumptions

Our recovery analysis assumes that CIFI would be liquidated in a bankruptcy because it is essentially an asset-trading company. The nature of homebuilding means the liquidation-value approach will almost always result in a much higher value than the going-concern approach.

We have assumed a 10% administrative claim, in line with our Recovery Rating criteria.

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%, raised from 70%, applied to account receivables. This treatment is in line with our Criteria.

Advance rate of 59% applied to net property inventory. CIFI's inventory consists mainly of completed properties held for sale, properties under development (PUD), as well as deposits and prepayments for land acquisition. Different advance rates were applied to these different inventory categories to derive the blended advance rates for net inventory.

Advance rate of 70% applied to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory.

Advance rate of 55% applied to PUD, which are more difficult to sell than completed projects and are at various stages of completion. The PUD balance - prior to applying the advance rate - is net of margin-adjusted customer deposits.

Advance rate of 90% applied to deposits and prepayments for land acquisition. Similar to completed commodity housing units, land held for development is closer to readily marketable inventory.

Advance rate of 50% applied to property, plant and equipment.

Advance rate of 20% applied to investment properties. CIFI's investment-property portfolio consists mainly of shopping malls. The portfolio has an average rental yield of below 2%, which is below the industry average.

Advance rate of 50% applied to 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.

Advance rate of 0% applied to excess cash, after netting the amount of note payables and trade payables (construction fee and retention payables). We do not assume available cash in excess of outstanding trade payables would be available for other debt-servicing purposes and therefore the advance rate for excess cash is 0%.

The allocation of value in the liability waterfall results in a Recovery Rating corresponding to 'RR4' for the senior unsecured offshore bonds.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Greater clarify on the repayment plans for its debt obligations

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Failure to service financial obligation in a timely manner

Any announcement of a default or default-like process

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Tight Liquidity: Fitch estimates that CIFI has large capital-market and syndicated loan maturities of CNY20 billion in 2023. Liquidity available for debt servicing may be insufficient to address its near term maturity amid market reports that it has failed to service its debt obligations in a timely manner.

Issuer Profile

CIFI is a top-20 property developer based in Shanghai, with a focus in the Yangtze River Delta, Pan Bohai Rim and central-western and southern China. CIFI started consolidating its property-management listed subsidiary, Ever Sunshine Lifestyle, in 2020. It owned a 24% stake at end-2021.

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

CIFI has an ESG Relevance Score of '5' for Group Structure and Financial Transparency due to its high exposure to JV and associates as well as its opaque financial arrangements with minority shareholders, which have a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

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

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