Fitch Ratings has downgraded
Fitch has also downgraded LVGEM's senior unsecured rating and the rating on its outstanding US dollar senior notes, issued by
The downgrade primarily reflects LVGEM's tight liquidity and uncertainty over its ability to refinance upcoming capital-market debt maturities, including the
Key Rating Drivers
High Refinancing Risk: We believe LVGEM will have to rely on external funding to address the
LVGEM is in negotiations to obtain
Tight Liquidity: LVGEM's available cash of
Operating Cash Outflows: LVGEM's net debt increased to
We expect operating cash flows to remain negative in 2H22, as we forecast contracted sales to be similar to 1H22, while the company continues to incur significant project development costs, including another
Sale of Project Stake to Vanke: In June, the company entered into an agreement to sell 20% of the economic rights in phases 3 and 4 of the Baishizhou project to
Derivation Summary
LVGEM's ratings are driven by its tight liquidity and risks to the refinancing of its upcoming capital-market maturities.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Attributable contracted sales of
Annual development costs, including land and construction costs, of
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that LVGEM would be liquidated in bankruptcy.
We have assumed a 10% administrative claim.
We use a multiple assumption tool to derive a 4x EBITDA multiple to estimate the going-concern value. Given the nature of homebuilding, the liquidation value approach always results in a much higher value than if the company continues as a going concern.
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of balance sheet assets that can be realised in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
54% advance rate applied to net inventory. LVGEM's inventory mainly consists of completed properties held for sale, properties under development (PUD) and deposits or prepayments for land acquisitions. Different advance rates were applied to these different inventory categories to derive the blended advance rates for net inventory.
50% advance rate to PUD. Unlike completed projects, PUDs are more difficult to sell. These assets are also in various stages of completion. A 50% advance rate was applied. The PUD balance - prior to applying the advance rate - is net of margin adjusted customer deposits and other non-current liabilities mainly related to the Baishizhou project.
90% advance rate to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory, and LVGEM has historically recorded strong gross margin of over 40%. As such, a higher advance rate (versus the typical 50% mentioned in the criteria) was applied.
90% advance rate to deposits or prepayments for land acquisitions. Similar to completed commodity housing units, land held for development are closer to readily marketable inventory given that LVGEM's land is well located. As such, a higher advance rate than the typical 50% mentioned in the criteria was considered.
50% advance rate to investment properties. LVGEM's investment properties mainly consist of commercial buildings in higher tier cities, such as
80% advance rate applied to trade receivables. As typical in the
60% advance rate applied to property, plant and equipment (PP&E). LVGEM's PP&E mainly consists of land and buildings, the value of which is insignificant.
0% advance rate to excess cash. The regulatory framework for
The allocation of value in the liability waterfall corresponds to a Recovery Rating of 'RR1' for the offshore senior unsecured debt. However, the Recovery Rating for senior unsecured debt is capped at 'RR4' because under Fitch's Country-Specific Treatment of Recovery Ratings Criteria,
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Sustained improvement in liquidity and funding access, with the company addressing upcoming capital-debt maturities in a timely manner
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to obtain new financing to address upcoming capital market-debt maturities in a timely manner
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 '
Issuer Profile
LVGEM is a small property developer specialising in urban-renewal projects in the Greater
Summary of Financial Adjustments
We exclude funds under regulation by banks for specific purposes and performance deposits required by government from cash and include them as inventory in our leverage calculation. Restricted bank deposits are included in cash to calculate net debt, as these are mainly pledged for obtaining bank loans.
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
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