Country Garden Downgraded by S&P as Weak Sales Squeeze Liquidity

S&P Global Ratings downgraded Country Garden on Monday after the business performance of China’s top developer by sales failed to meet expectations and stirred doubts about the group’s liquidity in the years ahead.

S&P lowered its long-term issuer credit rating on Country Garden by one notch to BB, with a negative outlook reflecting the risk that the company’s liquidity buffer and leverage could further deteriorate amid weaker sales and heavy spending on construction.

The agency expects the Guangdong-based builder’s ratio of consolidated debt to EBITDA to increase to 5.2 in 2022 and 2023 from 3.7 in 2021, driven by lower revenue booking from slower sales.

“Despite Country Garden’s efforts to reduce debt, we believe the weakening of EBITDA will outweigh debt reduction,” S&P said in a release. “We have therefore revised our assessment of the company’s financial risk profile to aggressive from significant.”

Ample Cash Buffer

According to S&P, one mitigating factor in Country Garden’s liquidity risk is an adequate cash buffer. The company had RMB 77 billion ($11 billion) in unrestricted cash at the end of June — down from RMB 97 billion at the end of 2021 but sufficient to cover short-term maturities of RMB 73 billion, including RMB 45 billion in bank loans.

“In our view, Country Garden’s unrestricted cash remains high because it has sound banking relationships and a good cash collection rate of more than 90 percent,” the agency said. “This is despite the fact that most of Country Garden’s projects are located in lower-tier cities where escrow account policies could be tighter after the nationwide mortgage boycott in July.”

Another lifeline for the company chaired by Yang Guoqiang is its onshore funding capabilities. In May, Country Garden was one of a few privately owned developers directed by the Chinese government to issue a RMB 500 million onshore corporate bond backed by credit default swaps.

On Tuesday, Country Garden announced the issue of an onshore medium-term note of up to RMB 1.5 billion, fully guaranteed by state-owned China Bond Insurance.

Regardless, S&P may further lower its rating if Country Garden’s ratio of debt to EBITDA nears 6 for an extended period, or if its ratio of EBITDA to interest falls below 3 for a similar period, the agency said.

Crisis Crimps Revenue

With China’s real estate crisis showing no signs of turning a corner despite a raft of stimulus measures, Country Garden has seen sales shrink at its projects. For the month of August, the developer’s contracted sales totalled RMB 28.9 billion, down 36 percent from the year-earlier period.

“We could revise the outlook to stable if Country Garden’s sales improve over the next 12 months,” S&P said.

Prices of new homes in 70 Chinese cities fell by 0.3 percent in August on a monthly basis after stabilising in June and July, according to official government statistics.

Meanwhile, investment in real estate development plunged 7.3 percent year-on-year to RMB 9 billion in the January-August period, with residential investment down 6.9 percent at RMB 6.9 billion.