[ET Net News Agency, 3 December 2019] S&P Global Ratings today said that Redco
Properties Group Ltd.'s (01622)(B/Stable/--) proposed US dollar-denominated senior
unsecured notes will help the China-based developer refinance its senior notes due January
2020.
However, the credit rating agency expects the issuance tenor will not be long enough to
improve Redco's capital structure. As of June 2019, Redco's weighted average maturity was
only 1.5 years, with 60% of its debt due within the next 12 months.
That said, S&P believes that Redco's liquidity profile is adequate given its high cash
balance. As of June 2019, the company had an unrestricted cash balance of RMB9.2 billion,
almost covering its short-term debt of RMB9.6 billion.
Redco has recently restated its 2019 interim financials due to its auditors realigning
the accounting treatment of two of the company's joint-venture projects. Due to the
reclassification of these project companies as subsidiaries instead of affiliates, RMB284
million in management income can no longer be recognized as revenue. The lowered revenue
figure triggered covenant breaches on the interest coverage requirement ratios under two
of its outstanding syndicated loans. Redco has since managed to revise the requirements
from lending banks.
In addition to indicating the increasing complexity of Redco's financial management,
this incident also highlights the volatility of the company's financial metrics due to its
small operating base.
Despite S&P's expectation that Redco's revenue recognition will pick up in the second
half due to strong contracted sales in prior years, the current rating buffer remains thin
due to high debt growth over the year. The company's gross debt level has increased by
over 40% to over RMB15.6 billion as of June 2019, from RMB11.1 billion as of the end of
2018.
The stable outlook on Redco reflects S&P's expectation that the company will continue to
expand its operating scale and maintain stable profitability. The outlook hinges on Redco
maintaining effective control over its debt leverage over the next two years with a
debt-to-EBITDA ratio staying at around 5.0x over that period. (KL)