This is a correction of the release published on
Fitch Ratings has downgraded the Long-Term Issuer Default Ratings and senior unsecured ratings on
The downgrade reflects Redsun's increasing refinancing risks, amid market reports that the company failed to make an interest payment that was due on 13 July for a bond.
The company has not provided further information to Fitch beyond its public announcements and Fitch was unable to verify the non-payment of interest.
Key Rating Drivers
Uncertain Bond Interest Payment: Redsun has not made any public statements in response to market news that the company missed an interest payment due on
Heightened Refinancing Risk: We believe the company may not be able to access the capital market in the short term and expect it to rely on cash on hand and internal cash flow to address upcoming maturities in 2H22 and 1H23.
Fitch estimates Hong Yang and Redsun had over
Weak Contracted Sales: Redsun's total contracted sales fell by 60% yoy in 6M22 to
Derivation Summary
Hong Yang's ratings reflect the increasing refinancing risks amid market reports about its non-payment of the bond interest.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuers:
Total contracted sales to decline by 36% in 2022 before increasing by 3% a year in 2023-2025;
Contracted average selling price to decrease by 15% in 2022 before recovering to low single-digit growth in 2023-2025;
Property development gross profit margin of about 16.9% in 2022-2025 (2021: 18%);
Minimal land acquisitions to prioritise debt repayment
KEY RECOVERY RATING ASSUMPTIONS
Fitch's recovery analysis assumes that Hong Yang and Redsun would be liquidated in a bankruptcy, as they are essentially asset-trading companies. The nature of homebuilding means the liquidation-value approach will almost always result in a higher value than the going-concern approach.
We assume a 10% administrative claim, in line with criteria.
Liquidation Approach
The liquidation estimate reflects our 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 Corporates Recovery Ratings and Instrument Ratings Criteria.
Advance rate of 58% applied to net property inventory. Redsun's inventory consists mainly of completed properties held for sale, properties under development (PUD) and deposits and prepayments for land acquisition. Different advance rates were applied to the various inventory categories to derive a blended advance rate.
Advance rate of 65% applied to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory and Redsun has a historically strong gross margin of around 20%. As such, we applied a higher advance rate than under criteria.
Advance rate of 55% applied to PUD. PUD 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 acquisitions. Similar to completed commodity housing units, land held for development is closer to readily marketable inventory. Redsun's land is mostly located in Tier 2 and 3 in the
Advance rate of 50% applied to property, plant and equipment, which consists mainly of buildings, the value of which is insignificant.
Advance rate of 60% applied to Redsun's investment properties. Redsun's investment property portfolio consists mainly of commercial buildings located in the
Advance rate of 100% applied to Hong Yang's investment properties, excluding Redsun, based on a high rental yield of over 10% and the location of the assets.
Advance rate of 50% applied to joint-venture net assets, which typically include a combination of completed units, PUD and land bank. The advance rate is in line with the baseline rate for inventory.
Advance rate of 0% applied to excess cash after netting the amount of note payables and trade payables (construction fee and retention payables).
The above items exclude the portion from
The allocation of value in the liability waterfall results in recovery corresponding to a Recovery Rating of 'RR2' for Redsun's senior unsecured offshore bonds and 'RR1' for Hong Yang's senior unsecured bonds. 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:
Greater clarity on the repayment plans for capital-market maturities for the rest of 2022
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to repay capital-market maturities or bond interest falling due in 2022
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: Hong Yang and Redsun have large capital-market maturities of
Issuer Profile
Hong Yang owns 72% of
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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