Shandong Ruyi Technology Group Downgraded To 'B-' On Strained Liquidity; Placed On CreditWatch Negative

  • Ruyi faces significant debt maturities over the next three months, but the progress of refinancing has been slower than expected.
  • Although the company is continuing its asset monetization plans for debt repayment, the timing of completion is uncertain.
  • On Sept. 19, 2019, S&P Global Ratings lowered its long-term issuer credit rating on Ruyi to 'B-' from 'B'. We also lowered the issue rating on the company's guaranteed senior unsecured debt to 'CCC+' from 'B-'. We are placing all the ratings on CreditWatch with negative implications.
  • We plan to resolve the CreditWatch status within the next three months when we have greater visibility on the timing of Ruyi's asset monetization plans.
HONG KONG (S&P Global Ratings) Sept. 19, 2019--S&P Global Ratings today took the rating actions listed above. We lowered the ratings on Shandong Ruyi Technology Group Co. Ltd. (Ruyi) and placed them on CreditWatch to reflect the company's heightened liquidity pressure. Ruyi has significant debt maturities over the next three months, but it has made limited progress in refinancing. Its pace of asset disposal is also slower than we expected.
Ruyi has Chinese renminbi (RMB) 4.7 billion of bullet debt due over the next three months. This includes RMB2.2 billion of domestic bonds that will become puttable in October and November and US$345 million (equivalent to RMB2.5 billion) overseas bonds due in December. The aggregated amount is higher than the company's unrestricted cash balance of RMB4.2 billion as of June 30, 2019. We believe that Ruyi is in talks with onshore bondholders to not exercise the put options. However, our base case assumes all of the puttable bonds will be put, given the uncertainties.
In addition, the company will have about RMB7.0 billion of bank loans due over the next 12 months and RMB2.5 billion of debt that will become due or puttable in the fourth quarter of 2020. We believe Ruyi is likely to roll over its short-term bank loans, given its good relationship with domestic banks.
Ruyi has made limited progress in refinancing. In our view, the company's access to domestic credit markets has deteriorated, given tight credit conditions and low investor appetite for debt issued by privately owned enterprises. Ruyi has not issued any new bullet debt since April 2019. While we believe the company's existing banking relationships are stable, it may be difficult for Ruyi to materially increase its credit lines from onshore banks in 2019.
We believe the company may have to rely on its cash on hand and net proceeds from asset disposals to repay the upcoming debt maturities, given limited time for a more expansive refinancing plan.
Ruyi intends to dispose several assets to raise funds but progress is slower than we expected. Any further delay in asset monetization could jeopardize creditors' confidence in the company's debt serviceability and add to the already high liquidity pressure. In the first half of 2019, Ruyi received RMB3.1 billion of net proceeds from asset disposals, but its cash balance remained similar to the end of 2018. Other assets that could be monetized include the company's 50% ownership in a power generation plant in Pakistan, a commercial complex and land in Shandong province, industrial properties, and shares of SMCP Group, its overseas fashion apparel subsidiary.
We expect Ruyi's debt-to-EBITDA ratio to decrease to 6.8x-7.0x in 2019 and 5.8x-6.0x in 2020, from 8.8x in 2018, driven by a recovery in the company's operating performance and cash inflows from the disposal of assets. Ruyi's willingness to scale back its capital investment also underpins our anticipation of a deleveraging trend. Our base case assumes the company's annual capital expenditure (capex) to decrease to RMB1.5 billion-RMB1.8 billion in 2019 and 2020, from RMB2.9 billion in 2018. We also believe the company and its ultimate parent, Beijing Ruyi Fashion Investment Holding Co. Ltd. (Beijing Ruyi), will both stop pursuing any sizable acquisitions until they can build sufficient financial cushion.
The rating action also reflects the deteriorating credit profile of Beijing Ruyi. Ruyi is the major cash-generating subsidiary of the group. We believe Beijing Ruyi has higher debt leverage and weaker liquidity than Ruyi, given several acquisitions made in the past two to three years, including Trinity Ltd. Nevertheless, we do not believe a slightly weaker credit profile of Beijing Ruyi constrains Ruyi's rating at this stage. There are no cross-default provisions between Beijing Ruyi and Ruyi's existing debts.
We expect to resolve the CreditWatch status within the next three months when we have greater visibility on the timing of Ruyi's asset monetization plan.
We could lower the rating if Ruyi's access to credit markets deteriorates further. An indication of that may be seen in a major portion of the onshore bondholders choosing to exercise their put option in the next one to two months. We could also lower the rating if Ruyi is unable to make any meaningful progress in asset disposal or refinancing within the next three months.
We could affirm the rating with a stable outlook if the company can accelerate the execution of its major asset monetization plans and improve its access to credit markets.
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