The downgrade follows the 15 August 2022 downgrade of guarantor CGH's Long-Term Issuer Default Ratings (IDRs) to 'BB+' from 'BBB-'. All of CGH's ratings remain on RWN, reflecting elevated near-term risks. Fitch will resolve the RWN on RLT's guaranteed debentures once the RWN on CGH's Long-Term IDRs is resolved. The National Long-Term Ratings on RLT's guaranteed debentures could be downgraded by more than one notch should CGH's ratings be downgraded.
Key Rating Drivers
The ratings on RLT's guaranteed debentures reflect the credit enhancement provided to investors by the full, unconditional and irrevocable guarantee by the parent, CGH. The guarantee ranks at least pari passu with CGH's unsecured and unsubordinated obligations.
The downgrade of CGH's ratings reflects a weakening in the company's financial flexibility due to challenges in China's property sector. Fitch believes that CGH's liquidity buffer, while adequate, is under pressure as declining sales coupled with working capital commitments put pressure on cash generation, while deterioration in capital market conditions has narrowed the company's funding sources.
The RWN on CGH reflects Fitch's view that the cash flow pressure may persist because a sustained stabilisation in sales remains uncertain. Fitch is also monitoring CGH's progress in securing additional onshore capital-market financing.
CGH's ratings are supported by its strong market position, scale and diversification. Fitch believes the company's liquidity is adequate as it continues to have some access to various funding channels. CGH's recent maturities are covered by capital market issues and the use of balance sheet cash.
Derivation Summary
The ratings on RLT's guaranteed debentures are based entirely on the credit profile of the guarantor, CGH, a leading homebuilder in China with one of the most well-diversified land banks among peers. CGH's 'BB+' Long-Term IDR maps to a 'A+(tha)' or 'A(tha)' National Long-Term Rating, according to Fitch's National Ratings Correspondence Table for Thailand. Fitch has rated RLT's debentures at the lower of the two National Long-Term Ratings allowed by the correspondence table given the more acute near-term risks to CGH's cash flows and market access compared with nationally rated peers in Thailand.
CGH's large operating scale and market position are comparable with that of The Siam Cement Public Company Limited (SCC, A+(tha)/Negative), one of the largest conglomerates in Thailand with business diversification in cement and building materials, petrochemical and packaging. The Negative Outlook on SCC is driven by medium-term risks to its deleveraging pace, while the RWN on CGH's ratings reflect more acute near-term risks. Therefore, RLT's debentures are rated one-notch lower than SCC.
CGH has a significantly larger operating scale and stronger market position than Siam City Cement Public Company Limited (SCCC, A(tha)/Stable), the second-largest cement producer in Thailand. However, this is more than offset by SCCC's very low leverage (net debt/EBITDA) of under 1.5x, resulting in SCCC being rated the same as RLT's debentures.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The RWN will be resolved once the RWN on CGH's Long-Term IDR is resolved.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A downgrade of CGH's Long-Term IDR.
Negative action on CGH's Long-Term IDR could result in a multiple-notch downgrade to the National Long-Term Rating on RLT's guaranteed debentures. For CGH's rating, the following sensitivities were outlined by Fitch in our Rating Action Commentary on 15 August 2022:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The RWN will be removed if the negative triggers are not met.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Persistent drain on working capital;
- No stabilisation in contracted sales or cash collection;
- No meaningful new issuance of domestic capital market debt.
Liquidity and Debt Structure
Guarantor's Liquidity Is Adequate: The rating on RLT's guaranteed debentures is based solely on the credit profile of the guarantor, CGH. CGH had CNY91.8 billion in available cash as of end-2021 (end-2020: CNY116.1 billion), after excluding CNY89.4 billion in restricted cash as well as guarantee deposits for the construction of presold properties.
Available cash was lower than short-term debt of CNY94.5 billion in 2021 (2020: CNY120.7 billion) after including asset-backed securities (ABS), but was sufficient to provide at least 3x cover on its capital market maturities over the next 12 months, including ABS. We also believe Country Garden can rollover the majority of its bank borrowings.
Issuer Profile
RLT is 100% indirectly owned by CGH, a leading homebuilder in Guangdong, China. RLT launched its first two projects in Thailand in 2018. It now has seven condominium and low-rise projects.
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.
Public Ratings with Credit Linkage to other ratings
The rating on the debentures is based entirely on the rating of the guarantor, CGH.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings