Xinhu Zhongbao's Proposed Guaranteed U.S. Dollar Senior Unsecured Notes Assigned 'B-' Rating

HONG KONG (S&P Global Ratings) March 24, 2020--S&P Global Rating today assigned its 'B-' long-term issue rating to a proposed issue of U.S.-dollar-denominated senior unsecured notes by Xinhu (BVI) 2018 Holding Co. Ltd., a subsidiary of Xinhu Zhongbao Co. Ltd. (B/Negative/--).
The parent Xinhu Zhongbao unconditionally and irrevocably guarantees the notes. The company plans to use the proceeds to refinance its existing medium- to long-term debts which are due within one year. The issue rating is subject to our review of the final issuance documentation.
We rate the notes one notch lower than the issuer credit rating on Xinhu Zhongbao because the debt is significantly subordinated relative to other debt in the company's capital structure. As of June 30, 2019, Xinhu Zhongbao's capital structure consisted of Chinese renminbi (RMB) 51 billion of secured debt and RMB34 billion of unsecured debt issued or guaranteed by the company at the holding company level. Secured debt accounted for 60% of the company's total debt, above our priority debt threshold of 50% for notching down. We estimate the secured debt ratio was above 50% at the end of 2019.
In our view, Xinhu Zhongbao's long development cycle for urban redevelopment projects (URPs) will continue to put pressure on its leverage. We estimate the company's leverage, as measured by the ratio of debt to EBITDA, was 12.5x-13x in 2019, and could gradually improve in 2020-2021. Given that the company has sufficient land bank to support development for at least the next three to four years, we believe it will not be as aggressive in land acquisitions as in the past.
The negative outlook on the issuer credit rating reflects our view that the company will face liquidity and refinancing pressure, given the large amount of debt maturing in the next 12 months. Despite the company repaying its US$600 million senior unsecured notes in March, 2020, it still has US$240 million and US$258 million senior unsecured notes puttable in December 2020 and March 2021, respectively, which will be partly refinanced through the proposed issuance. In our view, the company relies on cash on hand, improving sales performance, assets disposal, and successful debt refinancing to meet its high short-term borrowing.
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