Fitch Ratings has downgraded Times China Holdings Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CCC+', from 'B+', and its senior unsecured rating to 'CCC+', from 'B+', with the Recovery Rating remaining at 'RR4'.

The downgrade reflects Times China's tightening liquidity, as its funding access may not improve by 1H23, making it likely that it will need to repay its private corporate bonds due 2H22 and offshore bonds due March 2023 through internal cash and cash generation. The timely repayment of capital market debt hinges on a sustained sales recovery and the successful disposal of assets and urban redevelopment projects (URPs).

Key Rating Drivers

Significant Capital-Market Maturities: Times China has CNY1.6 billion in onshore bonds maturing or turning puttable in August, and CNY1.1 billion of onshore bonds maturing in September. It also has CNY11.9 billion of capital-market debt maturing in 2023, including CNY5.0 billion of offshore bonds and CNY6.4 billion of onshore bonds that turn puttable in 2023.

Limited Funding Access: We expect Times China's capital-market access to remain limited till 1H23. We believe the company will rely on sales proceeds, refunds from the government on its URPs and potential stake disposals in projects to repay its capital-market debt during this time. However, there are risks surrounding the timing of the receipt of refunds from the government and execution risks on the asset disposals.

Limited Liquidity Headroom: The company has not disclosed to Fitch its latest available cash balance for debt repayments, as the company is conducting an interim review. We believe its liquidity headroom has weakened in view of the poor sales in 1H22 and that the company is prioritising cash to repay its onshore debt in 3Q22, as it announced the deferral of the payment of cash dividends to shareholders to 29 July, from 4 July.

Sales Decline: Contracted sales dropped by 40% yoy in 1H22, broadly in line with the market. Sales in June rose by 14% mom to CNY5.2 billion, indicating a mild recovery. However, we believe a broader sales recovery in 2H22 remains uncertain. Apart from property sales, Time China's primary development business may generate some cash flow from the conversion of land parcels for local governments. However, the receipt of this cash flow is subject to the timing set by the local governments.

Doubt Over Going Concern: Times China's auditor, Ernst & Young, indicated in the developer's financial results for 2021 that there is material uncertainty over the company's ability to continue as a going concern, but the auditor's opinion is not modified in respect of this matter. The auditor stated that the group ability to continue as a going concern would depend on: new financing, acceleration of pre-sales and cash collection, control of costs and capex and disposal of assets or URPs when needed.

Derivation Summary

Times China's ratings are constrained by rising liquidity risk, as it may not be able to secure refinancing for upcoming capital-market maturities. We believe Times China's access to capital markets remains limited in the near term, which means it may use internal cash to repay its maturities. Fitch places high importance on financial flexibility amid the current volatile environment.

Key Assumptions

Total contracted sales of CNY55 billion-65 billion a year in 2022 and 2023

Unsold land bank life maintained at two to three years, and Times China will slow land acquisitions to prioritise debt repayment, if needed.

KEY RECOVERY RATING ASSUMPTIONS

The liquidation estimate reflects Fitch's 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 recovery rating criteria.

Advance rate of 24% applied to the book value of self-owned investment properties. The portfolio has an average rental yield of about 1%, which is low. The implied rental yield on the liquidation value for the investment-property portfolio would improve to 6%, which will be considered acceptable in a secondary market transaction.

Advance rate of 50% applied to property, plant and equipment, which mainly consists of buildings, the value of which is insignificant.

Advance rate of 59% applied to net property inventory. The inventory mainly consists of completed properties held for sales, properties under development (PUD), prepayments for redevelopment projects, and deposits for land acquisitions. Different advance rates were applied to these different inventory categories to derive the blended advance rate for net inventory.

Advance rate of 70% to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory. The company has historically gross margin for development property of around 20%-25%. Therefore, a higher advance rate of 70% (against the typical 50% mentioned in the criteria for inventory) was applied.

Advance rate of 50% to PUD and prepayment for development projects. Unlike completed projects, PUD are more difficult to sell. These assets are also in various stages of completion. A 50% advance rate was applied. The PUD balance - before applying the advance rate - is net of margin adjusted customer deposits.

Advance rate of 90% applied to deposits for land acquisitions. In a similar way to completed commodity housing units, land held for development is closer to readily marketable inventory provided it is in satisfactory locations. The company's land generally is not located in significantly disadvantaged areas. We applied a higher advance rate than the typical 50% mentioned in the criteria.

Advance rate of 80% applied to prepayments for URPs. We view this as similar to prepayments for land, as typically primary development will go through land auction again and the developer that did the primary development will be fully compensated even if they do not secure the land in the auction. We applied a higher advance rate than the typical 50% mentioned in the criteria.

Advance rate of 50% applied to joint-venture (JV) net assets. JV assets typically include a combination of completed units, PUD and land bank. A 50% advance rate was applied in line with the baseline advance rate for inventories.

The allocation of value in the liability waterfall results in a Recovery Rating corresponding to 'RR1' for the offshore senior notes. However, the Recovery Rating for senior unsecured debt is at 'RR4', as China falls into Group D of creditor-friendliness under Fitch's Country-Specific Treatment of Recovery Ratings Criteria. The Recovery Ratings for instruments by issuers with assets in this group are subject to a cap of 'RR4'.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Sustained improvement in liquidity and funding access, with the company addressing upcoming debt maturities in a timely manner

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Deterioration in liquidity or funding access to address bond maturities for the rest of 2022 and 1H23

Significant decline in contracted sales or cash collection

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Tight Liquidity: Times China had available cash of CNY14.7 billion, excluding restricted cash of CNY5.9 billion, at end-2021, covering CNY11 billion in short-term debt. Times China has not disclosed to Fitch its latest cash balance as the company is conducting the interim review, while it has CNY1.6 billion of onshore bonds maturing or puttable in August, and CNY1.1 billion of onshore bonds maturing in September. It also has CNY2 billion in offshore bonds maturing in March 2023 and CNY4.8 billion in onshore bonds puttable in 1H23.

Issuer Profile

Times China, established in 1999, focuses on residential projects in Guangdong province. Its total land bank was 19.9 million square metres at end-2021. The company has also acquired or signed preliminary agreements for about 160 URPs.

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

RATING ACTIONS

Entity / Debt

Rating

Recovery

Prior

Times China Holdings Limited

LT IDR

CCC+

Downgrade

B+

senior unsecured

LT

CCC+

Downgrade

RR4

B+

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2022 Electronic News Publishing, source ENP Newswire