Evergrande Cut by Moody’s, Faces Asset Freeze Petition Again
(Bloomberg) -- China Evergrande Group’s woes deepened as an advertiser sought legal action for payments and its credit rating was cut again by Moody’s Investors Service.
Meanwhile Moody’s lowered the credit grade on China’s most indebted developer by two notches to Caa1 with a negative outlook. Evergrande’s refinancing risk is “heightened” over the coming 12 to 18 months given its weakened funding access and liquidity position, Moody’s analysts led by Cedric Lai said in a statement late Monday.
The downgrade followed similar revisions by Fitch Ratings and S&P Global Ratings last week, and it’s the second cut by Moody’s since late June. The move by Leo Group may hamper sales campaigns by Evergrande, which has been aggressively marketing its property projects to raise cash, according to Bloomberg Intelligence analyst Kristy Hung.
“Evergrande’s liquidity challenges could heighten with a lawsuit by a marketing partner seeking the freezing of some assets of subsidiary Hengda for a payment,” Hung wrote.
Shares of Evergrande closed 7.9% lower at HK$5.22 on Tuesday, taking this year’s decline to 65%. The developer’s 6.98% local note due 2022 slid 1.2% to 61.74 yuan, reversing Monday’s gain.
The property giant has resorted to offloading assets as it tries to reassure investors about its financial health and meet China’s so-called three red lines -- requirements that curb developers’ debt ratios. It announced plans this week to sell more of its internet unit for HK$3.25 billion ($418 million) to ease funding pressure.
Top Chinese politicians defined Evergrande’s financial problems as “liquidity stress” and not an insolvency, REDD reported Monday, citing two unnamed sources. Evergrande plans to sell around 120 billion yuan ($18.6 billion) in assets and initiated talks with potential buyers such as China Jinmao Holdings Group in early June, REDD cited a third unidentified source as saying.
Moody’s said Evergrande’s funding access has weakened, as demonstrated by its highly volatile onshore and offshore bond prices. Investors and creditors have become less confident amid continued negative news about the company, it added.
A Caa level rating reflects “very high credit risk” at a bond issuer. The category below that, Ca, means Moody’s considers the issuer to be either in or very near default.
Evergrande’s primary objective of generating cash from property sales will continue to squeeze profit margins, Moody’s said. It expects the company’s gross margin to further shrink to between 16% and 18% over the next 12 to 18 months from 24% in 2020.
The developer’s sales dropped 13% last month from a year earlier to 44 billion yuan, a filing showed Tuesday. While July is a traditionally slow month for property transactions, it was the biggest decline since February, according to Bloomberg calculations based on the data. Average selling prices stood at 8,055 yuan per square meter in July, below an average 8,295 yuan in the first half.
©2021 Bloomberg L.P.