REDCO PROPERTIES GROUP LIMITED
Fitch Ratings has downgraded
The senior unsecured ratings have also been downgraded to 'C' from 'CCC-', and the Recovery Rating remains at 'RR4'.
The downgrade follows Redco's announcement that it has offered to purchase
Fitch considers the effective extension of the bond maturities by 9-12 months as a distressed debt exchange (DDE) under its criteria, although there is an incentive fee offered and no reduction in principal and interest. The IDR will be downgraded to 'RD' (Restricted Default) if the proposed offer to purchase the bonds is successfully completed. Fitch will then reassess Redco's credit profile to determine an IDR consistent with the company's capital structure and risk profile. The IDR will most likely be within a very low speculative-grade range.
Redco has not provided further information to Fitch beyond its public announcements.
Key Rating Drivers
Offer to Purchase Constitutes a DDE: The offer to purchase, if successful, will constitute a DDE under Fitch's criteria. Fitch, when considering whether the offer to purchase should be classified as a DDE, expects the following to apply: the offer to purchase imposes a material reduction in terms compared with the original contractual terms; and the offer to purchase is conducted to avoid bankruptcy, similar insolvency or intervention proceedings, or a traditional payment default.
Offer to Purchase to Avoid Default: Fitch considers the offer to purchase to be necessary for Redco to avoid default because of limited liquidity. Redco has
Material Reduction in Terms: We believe the offer to purchase presents a material reduction in the terms of the existing notes because there is an effective extension of the bond maturities by nine to 12 months, although there is a cash consideration for each principal amount of
Conditions of Purchase Offer: The company's obligation to consummate the offer to purchase is conditional upon the bondholders tendering not less than 90% in aggregate principal of the outstanding amount of the existing notes.
Consent Solicitation: Redco has also announced a consent solicitation for offshore bonds due
Derivation Summary
Redco's rating reflects Fitch's assessment that its offer to purchase amounts to a DDE.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Deteriorating contracted sales in line with negative market sentiment;
No land acquisitions.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Redco would be liquidated in a bankruptcy because it is essentially an asset-trading company.
We have assumed a 10% administrative claim in line with criteria.
We use a multiple assumption tool to derive a 4x EBITDA multiple to estimate the going-concern value. The nature of homebuilding means the liquidation value approach always results in a much higher value than the going-concern approach.
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of balance-sheet assets that can be realised in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
We have adopted an 80% advance rate for accounts receivable, in line with our criteria. Accounts receivable constitute a very small percentage of total assets for Redco, and this is typical in the Chinese homebuilding industry.
We have adopted a 50% advance rate to investment properties as Redco's investment-property portfolio mainly consists of commercial buildings in Tier 2 and Tier 3 cities with an implied yield of 5%-6%. We apply advance rates based on the quality and rental yield of the assets. For high quality assets, an advance rate above the typical 50% mentioned in the criteria for inventory can be considered. Conversely, a lower advance rate for weaker assets can be justified. Investment properties are typically reported at market value, unlike development-property assets, which are at historical cost.
A 50% advance rate on property, plant and equipment was applied because they are mainly assets under construction. They are not heavily depreciated on the balance sheet and not in exceptional locations.
A 54% advance rate to net inventory because Redco's inventory mainly consists of completed properties held for sale, properties under development (PUD) and deposits or prepayments for land acquisitions. Different advance rates were applied to these different inventory categories to derive the blended advance rates for net inventory.
A 70% advance rate to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory. Redco's gross margins of 20%-25% have been at similar levels to peers in recent years.
A 50% advance rate to PUDs, which are more difficult to sell, unlike completed projects. These assets are also in various stages of completion. The PUD balance - prior to applying the advance rate - is net of margin-adjusted customer deposits.
A 50% advance rate to deposits or prepayments for land acquisitions, in line with the typical 50% in criteria. Land held for development is similar to completed commodity housing units because it is more readily transferrable, provided it is in good locations. Around 70% of Redco's land is in Tier 2 and Tier 3 cities in
A 50% advance rate to joint venture net assets, in line with the baseline advance rate for inventories. These assets typically include a combination of completed units, PUDs and land bank.
A 0% advance rate to excess cash, as we do not assume available cash in excess of outstanding trade payables would be available for other debt-servicing purposes. Chinese homebuilding regulations require available cash, including pre-sales regulated cash, to be prioritised for project completion, which includes payment for trade payables. Net payables (trade payables - available cash) are included in the debt waterfall ahead of secured debt.
The allocation of value in the liability waterfall results in recovery corresponding to 'RR3' for the senior unsecured offshore bonds. However, the Recovery Rating is capped at 'RR4' because, under Fitch's Country-Specific Treatment of Recovery Ratings Criteria,
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch will reassess Redco's capital structure and cash flow after the completion of the offer to purchase, or if the offer to purchase is not completed, to determine its IDR and senior unsecured ratings.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch will downgrade Redco's IDR to 'RD' if the offer to purchase is completed, or if the company fails to meet any of the debt obligations.
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 '
Issuer Profile
Redco, founded in 1992 as a construction and decoration business, has ventured into property sales, and construction and project-management services. Property sales accounted for over 90% of the company's revenue in 2020 and 2021.
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
LT IDR
C
Downgrade
CCC-
senior unsecured
LT
C
Downgrade
RR4
CCC-
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VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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