Yihua Enterprise (Group) Co. Ltd. Rating Lowered To 'CCC' On Increased Refinancing Risk; Outlook Negative

  • Yihua Enterprise (Group) Co. Ltd. (Yihua) has insufficient cash on hand to repay significant near-term bond maturities of RMB7.4 billion in the next 12 months. The company also has limited access to external funding.
  • The China-based furniture maker has a refinancing plan with a tight timeline and high execution risk, leaving little room for slippage.
  • On July 26, 2019, S&P Global Ratings lowered its long-term issuer credit rating on Yihua to 'CCC' from 'B-'. We also lowered the long-term issue rating on the company's outstanding debt to 'CCC-' from 'CCC+'.
  • The negative outlook on Yihua reflects our view of increased refinancing risk over the next 12 months unless the company's access to capital markets is restored.
HONG KONG (S&P Global Ratings) July 26, 2019--S&P Global Ratings today took the rating actions listed above. We downgraded Yihua because the company faces execution risks and a tight refinancing timeline for maturities of about Chinese renminbi (RMB) 3.4 billion due over the next six months. This is given Yihua's limited financial resources and access to capital markets. Should the company successfully refinance over the period, we believe it could face additional liquidity pressure due to debt maturing in the following six months ending July 2020.
We see risks in Yihua's refinancing plan, especially at the holding company level, where the company has limited financial resources. As of June 30, 2019, the holding company faces RMB2.9 billion of puttable bonds that can be exercised over the next six months, against an unrestricted cash balance that we estimate at about RMB600 million.
Yihua's refinancing plan includes cash collection from self-owned and collaboration (with Poly Developments and Holdings Group Co. Ltd.) property projects, issuance of credit-enhanced bonds, other land assets to be monetized, and support from potential strategic investors based on the company's record. However, there are risks related to the timing of cash collection from property assets, which is dependent on the smooth progress of underlying projects. The likelihood of successful bond issuances depends on Yihua's ability to reverse the recent court-ordered freezes on trade in shares of key subsidiary, Yihua Lifestyle Technology Co. Ltd. (Yihua Life) and improving access to capital markets.
We believe the two separate court-ordered freezes on trade in 66% of Yihua holding company's shares in Yihua Life (holding company's total ownership of Yihua Life is 29%) has likely damaged Yihua's reputation in capital markets and highlights the company's weak corporate governance. Such actions have resulted in a material decline in domestic bond prices for Yihua and have likely impaired the company's access to additional bank loans. However, Yihua has resolved the first freeze on its shares and is working to resolve the second freeze, which could improve its access somewhat, if resolved quickly.
Additional support to Yihua's financing efforts could come from liquidation of its equity portfolio. The company's portfolio of A-share listed consumer and technology firms is valued at RMB3.2 billion as of June 30, 2019. We believe the majority of the portfolio is free of pledges, and could be liquidated, albeit at a discount. However, we believe Yihua would only liquidate its equity portfolio as a last resort, and, given a tight timeline, the amount received could subject the assets to a higher discount.
We see additional liquidity pressure over the six months ending July 2020, should the company successfully refinance its maturities within the next six months. Yihua has maturities of about RMB4 billion during the period with only some expected cash received from its property segment.
The negative outlook reflects our view that Yihua is dependent on timely collection of cash proceeds from Poly and successful refinancing through bank loans and capital markets to meet its significant debt maturities over the next 12 months.
While the company is looking at several refinancing options, we see high execution risks associated with them. Given Yihua's limited access to both credit and equity markets and insufficient cash and liquid investments, we see higher refinancing risk in the RMB3.4 billion of bonds due or puttable at the end of August, October, and November 2019.
We could lower the rating if Yihua isn't able to make timely collection of cash from Poly and if the company isn't able to make meaningful progress on its refinancing plans over the next six to 12 months.
We could revise the outlook to stable or raise the rating if Yihua's debt repayment plan for the upcoming RMB3.4 billion maturities is executed and market access is reestablished, such that the refinancing plan for their debt maturities in 2020 become credible and feasible.
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