Xinyuan Real Estate Rating Lowered To 'B-' On Persistently Tight Liquidity; Outlook Stable

  • We believe Xinyuan could face liquidity challenges as cyclical sales launches strain its cash collection.
  • The China-based developer's bullet maturities in late 2019 and in 2020 will pose refinancing risks, given relatively low unrestricted cash on hand. The proportion of debt due over the next 12-24 months is also significant.
  • On Sept. 12, 2019, S&P Global Ratings lowered its long-term issuer credit rating on Xinyuan to 'B-' from 'B'. We also lowered the long-term issue rating on the company's outstanding senior notes to 'CCC+' from 'B-'.
  • The stable outlook reflects our view that Xinyuan will proactively manage its maturing debt and maintain stable leverage over the next 24 months.
HONG KONG (S&P Global Ratings) Sept. 12, 2019--S&P Global Ratings today lowered the rating on Xinyuan Real Estate Co. Ltd. to reflect the company's tight liquidity as cyclical sales launches strain its cash collection. Xinyuan's cash level is likely to remain low, while its short-term debt will be significant given large "bullet" maturities (with principal repaid in a lump sum) over the next two years. In our view, the company is unlikely to improve its capital structure amid the tough funding environment.
Nevertheless, we believe that further downside to its liquidity profile appears limited at this stage. We acknowledge that the company is attempting to expedite sales and cash collection over the next six to 12 months. We also believe that Xinyuan is enhancing its treasury management. The company's proportion of short-term debt to total debt has declined substantially to 35% or Chinese renminbi (RMB) 8.6 billion as of June 2019, from 52% or RMB12.3 billion in June 2018.
That said, we estimate that total debt due over the 24 months to June 2021 remains very high at above 80%, with capital market issuance of nearly US$600 million due in 2021. Xinyuan's unrestricted cash position also decreased to RMB4.6 billion as of June 2019, from RMB7.7 billion in June 2018, covering only half of its short-term debt.
In our opinion, Xinyuan will remain weighed down by its weak maturity profile. Given that longer-tenor financing channels are less accessible, particularly from capital markets, Xinyuan will face difficulties extending its weighted average maturity to above two years. We estimate that the company's proportion of onshore bonds, which are unsecured and generally longer dated, to total debt fell to less than 10% as of June 30, 2019, from 20% a year ago, after repayments exceeded new issuance significantly. Trust loans, comprising another estimated 20%-25% of the company's debt, are also subject to increasing regulatory scrutiny for new drawdowns and maturity extension. Xinyuan has US$124 million in senior notes maturing in March 2020 and US$300 million due in November 2020.
Furthermore, despite Xinyuan's plan to speed up contracted sales, we expect cyclical sales launches and uneven sales distribution to continue to weigh on the company's liquidity. Xinyuan achieved sales of only RMB7.3 billion in the first half of 2019--just about 30% of its full-year target. As such, we expect bulky sales launches in the second half or the last quarter of the year, which will increase risks to sales and timely cash collection.
Xinyuan's land acquisition spending will likely resume in the second half of 2019 and in 2020. This could pose an additional burden to the company's cash level. As of June 30, 2019, Xinyuan had a land bank of 5.2 million square meters, located mainly in China's tier-one and tier-two cities. The company will likely replenish land to maintain sales growth, given its relatively concentrated land bank in Zhengzhou city (the capital of Henan province) which accounts for about 40% of its existing land reserve. Additionally, the development progress of some projects has been dragged down by regulatory hurdles and execution delays. We estimate land spending to be RMB3.5 billion-RMB4.0 billion in 2019 and RMB7.0 billion-RMB8.0 billion in 2020, versus RMB8.5 billion in 2018. Xinyuan has only acquired one parcel of land in Foshan, Guangdong province, for RMB1.22 billion this year.
We consider Xinyuan's debt-servicing ability as satisfactory, given its stable leverage and sufficient interest coverage. We estimate its debt-to-EBITDA ratio will remain at 6.0x-6.1x and its EBITDA interest coverage will be 1.7x over the next two years. These metrics are supported by the company's moderate revenue growth, stable margins, and mild debt expansion. They should help the company roll over most of its existing debts, especially the bank loans.
The stable outlook reflects our view that Xinyuan will manage its maturing debts and achieve targeted contracted sales in the next 12 months. Although we believe the company will remain bound by tight liquidity and a weak capital structure, it should be able to source sufficient refinancing to manage its maturities over the next six to 12 months.
We could lower the rating on Xinyuan if the company encounters difficulties in raising sufficient new capital to repay debt, or if we believe it lacks clear, viable plans for refinancing.
We may also lower the rating if its liquidity weakens further, with liquidity sources falling materially below uses or if its capital structure becomes unsustainable. This could be owing to significant slippage in contracted sales or funding difficulties, resulting in material cash depletion or sharp increases in funding costs.
We may upgrade the company if Xinyuan's liquidity and capital structure improve such that its ratio of liquidity sources to uses is sustainably above 1.2x, with increasing cash on hand covering short-term debt. At the same time, we would also expect to see the company's weighted average debt maturity lengthen to above 2.0 years, while its credit metrics of leverage and interest coverage remain stable.
Xinyuan is a Chinese residential property developer. As of June 2019, the company had projects in 23 cities in China, with total land reserves of about 5.2 million square meters. The company also has development projects in Malaysia, the U.K., and the U.S.
Xinyuan was founded in 1997 and is listed on the New York Stock Exchange. Founder and chairman Mr. Yong Zhang and co-founder Ms. Yuyan Yang are the largest shareholders, owning approximately 26.1% and 23.7%, respectively.
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