On June 22, international rating giant Moody’s assigned a Ba1 corporate family rating to China’s Country Garden Holdings and withdrew its Baa3 issuer rating.

This means the Chinese largest property developer’s credit rating has dropped to the high yield or the “junk level.”

In its announcement, Moody’s also changed Country Garden’s rating outlook from ratings under review to negative.

Kaven Tsang, a Moody’s Senior Vice President, explained that: “The rating downgrade reflects Country Garden’s declining property sales and deteriorating financial metrics amidst the challenging operating conditions of the China property sector, as well as its weakened access to long-term funding.”

Tsang said that while Moody’s expects Country Garden to maintain a strong market position and good liquidity, the negative outlook reflects its reducing liquidity buffer and financial flexibility.

The deteriorating financial indicators are driven by falling property sales and continued weak market sentiment in the next 6 -12 months.

In the first five months of this year, Country Garden’s attributable contracted sales dropped around 40% to 150.6 billion yuan (22.5 billion dollars) due to harsh conditions in China’s property market and the impact of Covid pandemic-led disruptions.

According to Moody’s forecasts, Country Garden’s attributable contracted sales could fall around 30% to about 400 billion yuan (60 billion dollars) in 2022.

Moody’s said the Chinese government had eased some restrictions in the real estate market. Country Garden’s high exposure to low-tier cities could expose it to sales volatility and profit margin pressure.

With difficult operating conditions, Moody’s said the developer’s gross margin could fall to 15-16% over the next 12-18 months from 18% in 2021.

In addition, the rating agency forecast that Country Garden’s access to the offshore bond market will remain constrained, given the weak market sentiment.

The news of Country Garden’s rating downgrade is not a surprise.

In early June, another rating giant, Fitch, downgraded Country Garden and placed the firm on the negative watch list.

However, the Chinese developer has downplayed Moody’s downgrade.

Country Garden said the rating downgrade wouldn’t impact its debt servicing ability and financing capability.

According to Mingtiandi, an Asia real estate intelligence site, Country Garden released a statement on June 23. It announced progress on the early redemption of an offshore bond as the company strives for an image of strength in a shaky industry.

A Country Garden spokesperson told China’s Securities Daily on June 23 that they see Moody’s rating adjustment as an action made for the slower-than-expected pace of the industry’s sales and financing environment.

The spokesperson said that the company is in stable operation and financial conditions. It just successfully issued a 500 million yuan corporate bond on May 20.

Separately, Country Garden sent a filing to the Hong Kong exchange filing on June 23. It said it is moving forward with a voluntary offer for an early buyback of a set of offshore bonds.

Investors holding 60.1% of the senior US dollar notes agreed to the early redemption, which translates to Country Garden repurchasing 411 million dollars of the principal.

Country Garden disclosed that the company has no maturity of US dollar bonds within the year after the completion of this repayment.

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