As Greenland rises in annual rankings, its credit rating gets shakier, from investment-grade to junk
Greenland Holding Group, whose subsidiary Greenland USA is the master developer of the Atlantic Yards/Pacific Park project. has risen steadily in the annual Fortune Global 500 ranking and Forbes Global 2000 ranking, suggesting a general wave of good news.
But there's also reason for wariness about aggressively expansive Chinese real estate companies that have expended aggressively abroad, like Greenland. In August 2019, the Wall Street Journal's Mike Bird recommended selling Greenland stock.
He noted that, while Greenland has cut debt in half, from a stratospheric figure, it has doubled "unearned revenues," which refers to properties bought by customers but not yet delivered.
As far as I can tell, the company's debt level--which Bird said "has halved to 188% of equity at the end of 2018, from an eye-watering 377% of equity in the third quarter of 2016"--has rebounded to more than 400% of equity.
Note that the Wall Street Journal says "All values updated annually at fiscal year end," so it's possible that figure is out of date.
Ratings downgrades
Ratings of Greenland by the three major credit ratings agencies have seen small but definitive downgrades over time, nudging the firm from the lowest-possible investment-grade rating into junk bond territory. That raises the cost of capital and casts a shadow on the company's expansion. It's notable that Greenland's overseas acquisitions seem but a blip on its overall profile.
While Greenland was China’s "most aggressive” developer, said the Wall Street Journal in an 8/5/14 article, because it could buy into projects--like Atlantic Yards--with its own equity rather than seek loans, today it's far more cautious. It needs cash, so it's selling assets, as in parts of the Metropolis project in Los Angeles, or backing away from prospective projects, as in south San Francisco.
With Atlantic Yards/Pacific Park, Greenland has leased three tower sites to other developers, TF Cornerstone and The Brodsky Organization, and partnered with Brodsky on another tower. That's certainly spread the risk, and raised assets to pay for an expensive deck over the Vanderbilt Yard.
Greenland's roadblocks
Writing in April 2015, From “China’s Greenland” to the “World’s Greenland”: the vigorous (and potentially precarious) ambitions of the new Atlantic Yards majority owner, I noted that, while Greenland's debt-funded development suggests deep pockets, it does not ensure safety. Greenland is vulnerable to major forces in China, as well as currency fluctuations and interest rate increases in the United States.
On 9/22/17, Hong Kong's South China Morning Post, citing ratings agencies, reported that Chinese property developers would face "a major refinancing cycle expected to last two years, " which would translate into risk if the firms instead had to get short-term loans.
The newspaper noted that Chinese regulators, according to Moody's had given the green light mainly to bonds--both domestic and offshore--to developers with ratings that were investment-grade or the upper-rung of junk.
That latter includes Greenland, which was cited as one of five developers that accounted for nearly half the financing coming due in 2018. In other words, it's hanging in there.
Greenland's credit rating has been affected by two key factors: debt leverage, as in the percentage of debt compared to the company's value; and also a shrinking ratio of earnings compared to interest payments, leaving less cushion to pay off debt. (Note that the term EBITDA means "Earnings before interest, tax, depreciation and amortization.")
Looking at ratings: 2013-14, investment grade
Rating's agency Moody's offered its first-ever rating 10/7/13 to Greenland, just four days before it and Forest City signed a tentative Atlantic Yards deal. The rating was Baa3, the lowest-rung of investment grade, a notch above junk. Moody's stated:
However, Moody's said, Greenland had projected high debt leverage--measured by debt to total capitalization--of about 70%, while EBITDA (earnings) were expected to be 3.5 times the interest required. Moody's would consider for downgrading Greenland's rating, it said, if leverage exceeded 70%-75%, and EBITDA/interest sunk below 3.5x.
It tweaked its expectations, suggesting debt leverage would be "70%-75% in the next 12-18 months," while EBITDA/interest coverage would be around 3.0x.
Moving the goalposts in 2014
While not saying so explicitly, that met Moody's criteria for a future downgrade, at least according to the 2013 criteria. At this point, however, Moody's moved the goalposts, warning that "EBITDA/interest below 3.0x in the next 1-2 years" could trigger a downgrade. (Ratings agencies have moved the goalposts with the Brooklyn arena bonds, as well.)
S&P said it expected "Greenland Group's leverage to remain high for the next 18-24 months because of its aggressive growth appetite."
Fitch cited increased debt: "We expect Greenland's leverage, as measured by net debt-to-adjusted inventory, to hover around 60% in 2015 to 2017, up from 55% at end-2014." (Note that Fitch's metric, debt to inventory, is not the same as the Moody's metric, debt to capitalization.)
The clouds gathered. In an announcement 4/29/16, S&P lowered Greenland's rating to BB, junk status, citing a "sharp deterioration in 2015, given the company's aggressive debt-funded expansion and weak cash collection from property sales." It removed the "one-notch uplift" supplied by Greenland's government ties.
To maintain liquidity, said S&P, Greenland "will depend on favorable credit markets and bank relationships to refinance its maturities."
Using different metrics from its rivals, S&P said Greenland's debt-to-earnings ratio had risen to 13.6x as of the end of 2015, versus 9.0x a year earlier. Using a similar--but likely not precisely the same--metric to Moody's, S&P said interest coverage dropped to 1.3x, versus 2.0x in 2014. That's pretty dramatic, indicating not much of a cash cushion. (Note that Moody's had said 2014 interest coverage was 2.3x.)
S&P predicted "a moderate improvement in cash collection in 2016 and 2017 as more residential projects will come into its sales pipeline," but said high costs meant increased debt.
No longer, S&P estimated, would the Shanghai government "provide timely and sufficient extraordinary support to the group in the event of financial distress (compared to a moderate likelihood previously)." Why? Greenland's greater independence and thus requirement to conform to market norms.
That same day as S&P's release, 4/29/16, Moody's announced it would review Greenland's ratings for a downgrade, citing "high debt leverage" of 78.5%," plus interest coverage that "dropped to around 1.8x in 2015 from around 2.3x in 2014."
"Overall, its credit metrics do not support a Baa3 issuer rating," Moody's said bluntly.
A month later came the Moody's downgrade. On 5/24/16, Moody's downgraded both Greenland and its Greenland Hong Kong subsidiary, nudging the firm into junk bond territory, to Ba1 from Baa3, and further calling its outlook negative. Moody's cited increased debt and debt leverage needed to fund Greenland's expansion.
Fitch on 6/15/16 followed up on its negative outlook by downgrading Greenland's general IDR bond rating to junk territory, BB+, saying its outlook was negative.
Also, Fitch downgraded Greenland's standalone rating another notch within junk, to BB from BB+, four months after first putting the company in junk bond territory. Fitch cited Greenland's leverage, again measured by net debt-to-adjusted inventory, at 66% by the end of 2015, above expectations of 58%.
Using another metric not used by rivals, Fitch said, "Greenland's operating efficiency, as measured by total contracted sales/total debt, decreased to 1.0x in 2015 from 1.3x in 2014 due to higher debt." (Rivals use earnings, not sales, in their metrics.)
Fitch, more optimistic than rivals regarding a government role, said it "believes the Shanghai SASAC, which owns 46% of Greenland," would still "exert significant influence on Greenland's ability to acquire quality sites for development; even though its stake is likely to fall after the company's planned share placement in 2016."
Moody's in an 8/17/16 announcement, said Greenland's 2016 first half results reflected continuing debt leverage, but were not beyond expectations. Moody's thus didn't change its Ba1 (junk) corporate family rating or its negative outlook. Greenland's debt leverage had nudged up to 79.2%, but expected sale of new shares, adding equity, would reduce that debt leverage, said the ratings agency.
Revenue growth meant some good news. Moody's noted that interest coverage had reached 1.8x for the 12 months ended June 2016 from around 1.7x in 2015. That number should continue rising, Moody's said, given lower average funding costs.
Fitch, in an announcement 9/9/16, gave Greenland bonds sold in the United States a BB+ rating, again junk. It said Greenland's leverage--again using its own metrics--had risen to 74% after the first half of 2016, versus 66% at the end of 2015 and 62% at the end of 2014. Its sales/debt ratio remained stuck at 1.0x.
Fitch had some good news: the "sizeable off-balance-sheet uncollected sales proceeds from both residential and commercial property sales" could lower Greenland's leverage, once the money came in.
2017 ratings
In an 8/5/20 credit opinion, Moody's affirmed Greenland's Ba1 corporate family rating, citing:
Moody's noted that on 7/26/20, Greenland announced that the state-owned percentage could decrease to 28.87% from 46.37%, but said it expected Greenland "to continue to benefit from its close link with the Shanghai government and, therefore, maintain its strong funding access."
It set out the company's scope:
A chart noted that Greenland's revenue to debt had risen from 85% at the end of 2016--seemingly dangerous--to 137% at the end of 2019, an estimated 131% at the end of 2020, and 143% by the end of 2021.
The big picture
In an announcement 4/16/20, Moody's changes outlook on China property sector to negative; refinancing risk remains manageable for most, the firm said that "coronavirus-related disruptions and slowing economic growth are weighing on property demand and inventory levels, while offshore funding conditions will remain uncertain."
Still, the established developers "are generally well-positioned to withstand the weakened business conditions," said Celine Yang, a Moody's Assistant Vice President and Analyst.
Presumably that's what Greenland is banking on.
But there's also reason for wariness about aggressively expansive Chinese real estate companies that have expended aggressively abroad, like Greenland. In August 2019, the Wall Street Journal's Mike Bird recommended selling Greenland stock.
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| WSJ, Aug. 21 2020 |
As far as I can tell, the company's debt level--which Bird said "has halved to 188% of equity at the end of 2018, from an eye-watering 377% of equity in the third quarter of 2016"--has rebounded to more than 400% of equity.
Note that the Wall Street Journal says "All values updated annually at fiscal year end," so it's possible that figure is out of date.
Ratings downgrades
Ratings of Greenland by the three major credit ratings agencies have seen small but definitive downgrades over time, nudging the firm from the lowest-possible investment-grade rating into junk bond territory. That raises the cost of capital and casts a shadow on the company's expansion. It's notable that Greenland's overseas acquisitions seem but a blip on its overall profile.
While Greenland was China’s "most aggressive” developer, said the Wall Street Journal in an 8/5/14 article, because it could buy into projects--like Atlantic Yards--with its own equity rather than seek loans, today it's far more cautious. It needs cash, so it's selling assets, as in parts of the Metropolis project in Los Angeles, or backing away from prospective projects, as in south San Francisco.
With Atlantic Yards/Pacific Park, Greenland has leased three tower sites to other developers, TF Cornerstone and The Brodsky Organization, and partnered with Brodsky on another tower. That's certainly spread the risk, and raised assets to pay for an expensive deck over the Vanderbilt Yard.
Greenland's roadblocks
Writing in April 2015, From “China’s Greenland” to the “World’s Greenland”: the vigorous (and potentially precarious) ambitions of the new Atlantic Yards majority owner, I noted that, while Greenland's debt-funded development suggests deep pockets, it does not ensure safety. Greenland is vulnerable to major forces in China, as well as currency fluctuations and interest rate increases in the United States.
On 9/22/17, Hong Kong's South China Morning Post, citing ratings agencies, reported that Chinese property developers would face "a major refinancing cycle expected to last two years, " which would translate into risk if the firms instead had to get short-term loans.
The newspaper noted that Chinese regulators, according to Moody's had given the green light mainly to bonds--both domestic and offshore--to developers with ratings that were investment-grade or the upper-rung of junk.
That latter includes Greenland, which was cited as one of five developers that accounted for nearly half the financing coming due in 2018. In other words, it's hanging in there.
Greenland's credit rating has been affected by two key factors: debt leverage, as in the percentage of debt compared to the company's value; and also a shrinking ratio of earnings compared to interest payments, leaving less cushion to pay off debt. (Note that the term EBITDA means "Earnings before interest, tax, depreciation and amortization.")
Looking at ratings: 2013-14, investment grade
Rating's agency Moody's offered its first-ever rating 10/7/13 to Greenland, just four days before it and Forest City signed a tentative Atlantic Yards deal. The rating was Baa3, the lowest-rung of investment grade, a notch above junk. Moody's stated:
"Greenland's Baa3 issuer rating reflects its large scale, good track record in delivering strong growth in the property development business and leading positions in its key markets, such as Shanghai," says Franco Leung, a Moody's Assistant Vice President and Analyst.Greenland, Moody's noted, was China's second-largest property developer. Its control, significantly by the city of Shanghai--the Shanghai Municipal State-owned Assets Supervision and Administration Commission had "an effective shareholding of about 60.7% in Greenland"--gave it access to funding and land. (Here's more on state ownership and the murky description to Brooklynites.)
However, Moody's said, Greenland had projected high debt leverage--measured by debt to total capitalization--of about 70%, while EBITDA (earnings) were expected to be 3.5 times the interest required. Moody's would consider for downgrading Greenland's rating, it said, if leverage exceeded 70%-75%, and EBITDA/interest sunk below 3.5x.
Some eight months later, in a 6/20/14 press release assigning a provisional Baa3 rating to proposed bonds, Moody's called its rating stable and noted that Greenland's "adjusted debt/total capitalization increased to about 74.1% from 72.3%" from 2012 to 2013.
It tweaked its expectations, suggesting debt leverage would be "70%-75% in the next 12-18 months," while EBITDA/interest coverage would be around 3.0x.
Moving the goalposts in 2014
While not saying so explicitly, that met Moody's criteria for a future downgrade, at least according to the 2013 criteria. At this point, however, Moody's moved the goalposts, warning that "EBITDA/interest below 3.0x in the next 1-2 years" could trigger a downgrade. (Ratings agencies have moved the goalposts with the Brooklyn arena bonds, as well.)
On 10/9/14, Moody's offered similar Baa3 ratings to Greenland's proposed bonds for offshore projects, while warning about high debt leverage and low coverage of interest.
The ratings agency continued to move the goalposts. It would still consider a rating downgrade if leverage exceeded 70%-75%, but now cited "EBITDA/interest below 2.5-3.0x on a sustained basis." (Previously, coverage falling below 3.0x would've been a trigger.) In other words, ratings agencies sometimes give issuers--which pay them--some slack.
Looking at ratings: 2015, still investment grade
In an announcement 7/30/15, Moody's didn't issue a new rating, but said its outlook on the Baa3 rating was now negative, adjusted from stable. Indeed, Greenland's numbers looked worse: debt leverage up to 78% and interest coverage that "dropped to 2.3x in 2014 from 2.8x in 2013.
That was below 2.5x, the trigger for a downgrade, albeit not necessarily "on a sustained basis."
Moody's blamed that increased debt leverage on the combination of Greenland's rapid expansion coupled with slow receipt of payments in the commercial property business.
Moody's said it would consider a downgrade if leverage remained above 75%--an adjustment of the goalposts, given the previous range of 70%-75%--and interest coverage "below 3.0x on a sustained basis." Moody's also noted that a reduction in the Shanghai government's ownership level also would be negative.
Looking at ratings: 2015, still investment grade
In an announcement 7/30/15, Moody's didn't issue a new rating, but said its outlook on the Baa3 rating was now negative, adjusted from stable. Indeed, Greenland's numbers looked worse: debt leverage up to 78% and interest coverage that "dropped to 2.3x in 2014 from 2.8x in 2013.
That was below 2.5x, the trigger for a downgrade, albeit not necessarily "on a sustained basis."
Moody's blamed that increased debt leverage on the combination of Greenland's rapid expansion coupled with slow receipt of payments in the commercial property business.
Moody's said it would consider a downgrade if leverage remained above 75%--an adjustment of the goalposts, given the previous range of 70%-75%--and interest coverage "below 3.0x on a sustained basis." Moody's also noted that a reduction in the Shanghai government's ownership level also would be negative.
Rival Standard & Poor's also looked pessimistically at Greenland. In an 8/19/15 press release about the lowered rating of subsidiary Greenland Hong Kong Holdings, S&P said it had downgraded Greenland HK's parent Greenland Group to BBB- from BBB. For S&P, that's the lowest level for investment grade.
S&P said it expected "Greenland Group's leverage to remain high for the next 18-24 months because of its aggressive growth appetite."
The clouds gathered. In a press release 8/27/15, Moody's called Greenland's results in the first half of 2015 "credit negative, but within expectation," citing debt leverage reaching 79%. Moody's said:
Looking at ratings: 2016 going to junk
The third ratings company, Fitch, in a 2/24/16 announcement, affirmed Greenland's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at BBB-, the lowest notch of investment grade, but downgraded its outlook on this segment of Greenland's financing to negative, from stable.
On a positive note, Moody's says that Greenland has improved its disclosure following its listing on the Shanghai Stock Exchange, with more timely interim statements and an improved level of disclosure.In a press release 12/9/15, Moody's called a proposed Greenland private share placement "credit positive," because it would increase cash and lower debt leverage, to about 69%.
The Shanghai State-Owned Assets Supervision and Administration Commission remains Greenland's largest shareholder, at 46%. Moody's expects this government-owned status will continue to support Greenland's good access to funding and help it maintain its important role in the urbanization of Shanghai.
Looking at ratings: 2016 going to junk
The third ratings company, Fitch, in a 2/24/16 announcement, affirmed Greenland's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at BBB-, the lowest notch of investment grade, but downgraded its outlook on this segment of Greenland's financing to negative, from stable.
It also said it had downgraded "Greenland's standalone rating to 'BB+' from 'BBB-'," to junk. That included what Fitch called a "one-notch uplift reflecting its moderately strong linkage with its parent" SASAC.
Fitch cited increased debt: "We expect Greenland's leverage, as measured by net debt-to-adjusted inventory, to hover around 60% in 2015 to 2017, up from 55% at end-2014." (Note that Fitch's metric, debt to inventory, is not the same as the Moody's metric, debt to capitalization.)
The clouds gathered. In an announcement 4/29/16, S&P lowered Greenland's rating to BB, junk status, citing a "sharp deterioration in 2015, given the company's aggressive debt-funded expansion and weak cash collection from property sales." It removed the "one-notch uplift" supplied by Greenland's government ties.
To maintain liquidity, said S&P, Greenland "will depend on favorable credit markets and bank relationships to refinance its maturities."
Using different metrics from its rivals, S&P said Greenland's debt-to-earnings ratio had risen to 13.6x as of the end of 2015, versus 9.0x a year earlier. Using a similar--but likely not precisely the same--metric to Moody's, S&P said interest coverage dropped to 1.3x, versus 2.0x in 2014. That's pretty dramatic, indicating not much of a cash cushion. (Note that Moody's had said 2014 interest coverage was 2.3x.)
S&P predicted "a moderate improvement in cash collection in 2016 and 2017 as more residential projects will come into its sales pipeline," but said high costs meant increased debt.
No longer, S&P estimated, would the Shanghai government "provide timely and sufficient extraordinary support to the group in the event of financial distress (compared to a moderate likelihood previously)." Why? Greenland's greater independence and thus requirement to conform to market norms.
That same day as S&P's release, 4/29/16, Moody's announced it would review Greenland's ratings for a downgrade, citing "high debt leverage" of 78.5%," plus interest coverage that "dropped to around 1.8x in 2015 from around 2.3x in 2014."
"Overall, its credit metrics do not support a Baa3 issuer rating," Moody's said bluntly.
A month later came the Moody's downgrade. On 5/24/16, Moody's downgraded both Greenland and its Greenland Hong Kong subsidiary, nudging the firm into junk bond territory, to Ba1 from Baa3, and further calling its outlook negative. Moody's cited increased debt and debt leverage needed to fund Greenland's expansion.
Fitch on 6/15/16 followed up on its negative outlook by downgrading Greenland's general IDR bond rating to junk territory, BB+, saying its outlook was negative.
Also, Fitch downgraded Greenland's standalone rating another notch within junk, to BB from BB+, four months after first putting the company in junk bond territory. Fitch cited Greenland's leverage, again measured by net debt-to-adjusted inventory, at 66% by the end of 2015, above expectations of 58%.
Using another metric not used by rivals, Fitch said, "Greenland's operating efficiency, as measured by total contracted sales/total debt, decreased to 1.0x in 2015 from 1.3x in 2014 due to higher debt." (Rivals use earnings, not sales, in their metrics.)
Fitch, more optimistic than rivals regarding a government role, said it "believes the Shanghai SASAC, which owns 46% of Greenland," would still "exert significant influence on Greenland's ability to acquire quality sites for development; even though its stake is likely to fall after the company's planned share placement in 2016."
Moody's in an 8/17/16 announcement, said Greenland's 2016 first half results reflected continuing debt leverage, but were not beyond expectations. Moody's thus didn't change its Ba1 (junk) corporate family rating or its negative outlook. Greenland's debt leverage had nudged up to 79.2%, but expected sale of new shares, adding equity, would reduce that debt leverage, said the ratings agency.
Revenue growth meant some good news. Moody's noted that interest coverage had reached 1.8x for the 12 months ended June 2016 from around 1.7x in 2015. That number should continue rising, Moody's said, given lower average funding costs.
Fitch, in an announcement 9/9/16, gave Greenland bonds sold in the United States a BB+ rating, again junk. It said Greenland's leverage--again using its own metrics--had risen to 74% after the first half of 2016, versus 66% at the end of 2015 and 62% at the end of 2014. Its sales/debt ratio remained stuck at 1.0x.
Fitch had some good news: the "sizeable off-balance-sheet uncollected sales proceeds from both residential and commercial property sales" could lower Greenland's leverage, once the money came in.
2017 ratings
Greenland and peers faced a new outlook. The Financial Times reported, in a 3/22/17 article headlined Debt piles add to risk for China’s property groups:
“China’s more heavily indebted developers are living on a knife’s edge,” says Andrew Collier, managing director of Orient Capital Research, an investment research group in Hong Kong.
The Financial Times cited Greenland, which ranked fourth in 2016 property sales, as having "heavy debts," noting that "Close links between corporate and state interests have tempted investors to consider big property groups as sure-fire investments, no matter the scale of their debt or asset quality."
Greenland's operating performance had stabilized, so revenue growth nudged interest coverage up to around 2.5x in 2016 from around 2.1x in 2015, despite increased interest expense, Moody's said.
On 8/10/17, Moody's assigned a Ba2 rating to Greenland Holding Group's proposed U.S. notes, one notch below the corporate rating of Ba1 "due to structural subordination risk" (i.e., a lower priority for recovery). On 8/31/17, Moody's said the firm's first-half of 2017 results showed "slightly improved credit metrics," but didn't change the rating or the negative outlook.
"Greenland Holding's credit metrics mildly improved, but its debt leverage remains high for its rating," said Moody's VP Franco Leung. That leverage improved to around 78.2% from 79.1% at the end of 2016. Interest coverage remained at around 2.5x.
On 9/20/17, S&P affirmed Greenland's BB rating, noting a negative outlook, citing "the company's high leverage and weak debt servicing capacity over the next 12 months."
2018 ratings
On 1/30/18, Moody's again assigned that Ba2 rating to Greenland's proposed U.S. notes, aimed to "refinance existing offshore debt and for general corporate purposes."
Moody's said it expected leverage to improve to 74%-77% over the next 12 to 18 months, which still "positions the company weakly at its Ba1 [junk] corporate family rating."
On 2/28/18, Fitch downgraded Greenland to BB-, the third notch of junk, with a negative outlook:
In a 3/13/18 rating, Moody's assigned Ba2 backed senior unsecured rating, with a negative outlook to a proposed refinancing.
Moody's cited a "preliminary unaudited 17.3% year-over-year increase in revenue" for Greenland, but noted the debt rating was one notch below the parent company rating, given the lower likelihood debts at operating subsidiaries would be paid.
The ratings agency said it would consider upgrading to a stable outlook if Greenland lowered its debt leverage to 70%-72.5% and adjusted EBIT/interest went above 2.5x, but would consider a downgrade if it went in the other direction.
On 6/14/18, Fitch revised its outlook to stable, thought it affirmed the BB- rating. The reason: Greenland had halted an increase in leverage.
Still, Fitch predicted that leverage would approach 60% in the next two years, while it was unlikely to reach 50%, because Greenland "will have to use 30% of its collected sales proceeds to replenish land to maintain its business scale."
On 9/20/18, Moody's affirmed Greenland at a Corporate Family Rating (CFR) of Ba1, the highest level of junk, nudging up the outlook to stable from negative. Moody's expected deleveraging of debt and more cash flow.
But the rating was constrained by "weak but improving credit metrics."
In an announcement 8/30/19, Moody's said that most high-yield Chinese property developers had a buffer--given strong revenue as well as relatively limited foreign-currency debt--against "a hypothetical scenario in which the RMB depreciates about 10% against the US dollar: to 8.0 from the 7.15 exchange rate on 27 August." Note that the exchange rate is today a robust 6.92.
S&P, in an announcement 10/11/19 affirmed its BB- rating but revised the outlook to positive, saying "earnings growth and positive cash generation will likely contribute to continuous deleveraging over the next 12 months."
S&P cited "a significant improvement in leverage (ratio of debt to EBITDA) to 5.5x for the 12 months ended June 2019, from 6.7x and 7.0x for the same period in 2018 and 2017, respectively."
Similarly, on 11/6/19, Fitch affirmed its Greenland rating, with a stable outlook. It noted that "Greenland's net leverage, measured by net debt to adjusted inventory, rose to 70%" because of one major project as well as other factors, but said it expected leverage to gradually decline.
Greenland's rating, Fitch notes, "is constrained by higher leverage" than most peers, though it has "a large amount of uncollected sales to mitigate its high leverage."
While the other two ratings agencies haven't issued reports in 2020, Moody's has done so. Announcing another credit review 1/17/20, Moody's cited Greenland's weak interest coverage:
Greenland would be upgraded if "its revenue/debt remains above 140% and EBIT/interest remains above 3.5x on a sustained basis," while it could be downgraded "with revenue/adjusted debt below 100% and adjusted EBIT/interest below 2.0x-2.5x on a sustained basis."
On 5/5/17, Moody's reported elevated 2016 debt leverage for Greenland, "to around 79.1% at end-2016 from 77.4% at end-2015," again citing the company's rapid expansion. Still, Moody's didn't change its Ba1 rating and negative outlook.
Greenland's operating performance had stabilized, so revenue growth nudged interest coverage up to around 2.5x in 2016 from around 2.1x in 2015, despite increased interest expense, Moody's said.
On 8/10/17, Moody's assigned a Ba2 rating to Greenland Holding Group's proposed U.S. notes, one notch below the corporate rating of Ba1 "due to structural subordination risk" (i.e., a lower priority for recovery). On 8/31/17, Moody's said the firm's first-half of 2017 results showed "slightly improved credit metrics," but didn't change the rating or the negative outlook.
"Greenland Holding's credit metrics mildly improved, but its debt leverage remains high for its rating," said Moody's VP Franco Leung. That leverage improved to around 78.2% from 79.1% at the end of 2016. Interest coverage remained at around 2.5x.
On 9/20/17, S&P affirmed Greenland's BB rating, noting a negative outlook, citing "the company's high leverage and weak debt servicing capacity over the next 12 months."
2018 ratings
On 1/30/18, Moody's again assigned that Ba2 rating to Greenland's proposed U.S. notes, aimed to "refinance existing offshore debt and for general corporate purposes."
Moody's said it expected leverage to improve to 74%-77% over the next 12 to 18 months, which still "positions the company weakly at its Ba1 [junk] corporate family rating."
On 2/28/18, Fitch downgraded Greenland to BB-, the third notch of junk, with a negative outlook:
The Negative Outlook and the standalone rating are driven by Greenland's persistently high leverage of above 60% as the company has remained aggressive in expanding its land bank and took on more debt for its non-property businesses. Leverage, as measured by net debt to adjusted inventory, had reached approximately 77% by end-June 2017 - a level at which we may consider further negative rating action if it is sustained over a 12-month period.Fitch noted that Shanghai State-Owned Assets Supervision and Administration Commission (SASAC) has 46% ownership, while the employee union led by Greenland's chairman owns 29%.
In a 3/13/18 rating, Moody's assigned Ba2 backed senior unsecured rating, with a negative outlook to a proposed refinancing.
Moody's cited a "preliminary unaudited 17.3% year-over-year increase in revenue" for Greenland, but noted the debt rating was one notch below the parent company rating, given the lower likelihood debts at operating subsidiaries would be paid.
The ratings agency said it would consider upgrading to a stable outlook if Greenland lowered its debt leverage to 70%-72.5% and adjusted EBIT/interest went above 2.5x, but would consider a downgrade if it went in the other direction.
On 6/14/18, Fitch revised its outlook to stable, thought it affirmed the BB- rating. The reason: Greenland had halted an increase in leverage.
Still, Fitch predicted that leverage would approach 60% in the next two years, while it was unlikely to reach 50%, because Greenland "will have to use 30% of its collected sales proceeds to replenish land to maintain its business scale."
On 9/20/18, Moody's affirmed Greenland at a Corporate Family Rating (CFR) of Ba1, the highest level of junk, nudging up the outlook to stable from negative. Moody's expected deleveraging of debt and more cash flow.
On 9/27/18, S&P affirmed its junk rating for Greenland but revised the outlook to stable, given an expectation of steady sales growth and improved leverage:
In our view, Greenland Group is adopting more prudent financial management. It has reduced its debt-to-EBITDA ratio to slightly more than 6.5x for the 12 months ending June 2018, from 7.4x in 2017 and 9x in 2016. In our view, Greenland Group has turned more cautious on its debt management over the past year, partly due to the Chinese government's recent campaign to reduce leverage at state-owned enterprises (SOE). This SOE has slowed down its previously aggressive expansion.
2019 ratings
On both 1/16/19 and 3/5/19, Moody's assigned a Ba2 rating--again, the second notch in junk--to Greenland's proposed USD-denominated notes, with a stable outlook. The proposed notes were said to have "a limited impact on the company's leverage, because the majority of the proceeds will be used to refinance existing debt."
On 5/23/19, Moody's announced a periodic review of Greenland's ratings, but no new credit rating action, suggesting that the "Ba1 corporate family rating is supported by the company's (1) large scale with nationwide coverage and a range of products in China (A1 stable), (2) growing construction business, which partly mitigates cyclicality in its property development business, and (3) good access to funding, supported by its status as a local state-owned enterprise (SOE)."
But the rating was constrained by "weak but improving credit metrics."
In an announcement 8/30/19, Moody's said that most high-yield Chinese property developers had a buffer--given strong revenue as well as relatively limited foreign-currency debt--against "a hypothetical scenario in which the RMB depreciates about 10% against the US dollar: to 8.0 from the 7.15 exchange rate on 27 August." Note that the exchange rate is today a robust 6.92.
S&P, in an announcement 10/11/19 affirmed its BB- rating but revised the outlook to positive, saying "earnings growth and positive cash generation will likely contribute to continuous deleveraging over the next 12 months."
S&P cited "a significant improvement in leverage (ratio of debt to EBITDA) to 5.5x for the 12 months ended June 2019, from 6.7x and 7.0x for the same period in 2018 and 2017, respectively."
Similarly, on 11/6/19, Fitch affirmed its Greenland rating, with a stable outlook. It noted that "Greenland's net leverage, measured by net debt to adjusted inventory, rose to 70%" because of one major project as well as other factors, but said it expected leverage to gradually decline.
Greenland's rating, Fitch notes, "is constrained by higher leverage" than most peers, though it has "a large amount of uncollected sales to mitigate its high leverage."
Moody's 2020 assessment
While the other two ratings agencies haven't issued reports in 2020, Moody's has done so. Announcing another credit review 1/17/20, Moody's cited Greenland's weak interest coverage:
While we expect the company's revenue/adjusted debt to continue to improve to 135%-145% in the next 12-18 months because of strong revenue growth and a slower pace of land acquisitions, the company's interest coverage is likely to remain weak for its Ba1 rating at around 3.1x, as higher interest expenses and weakening margins will offset the revenue growth.
In a 6/17/20 update to credit analysis, Moody's called its Ba1 rating stable:
A key constraint on Greenland Holding’s rating is its weak margins and interest coverage. We expect its EBIT/interest coverage to decline to 2.7x-2.8x over the next 12-18 months from 3.3x in 2019, mainly because of higher interest expenses and weakening margins. Its rating is also constrained by the execution risks associated with fast growth in its construction and other non-property businesses.
Greenland's refinancing needs are high over the next 12-18 months. Nonetheless, it has a good history of accessing different funding channels,
Interestingly, Moody's stated that, based on its "Homebuilding And Property Development Industry rating methodology," Greenland's financials merit a Baa3 rating, one notch above junk. But the Ba1 rating reflects risks "associated with the company's fast-expanding construction business, which has boosted revenue and its related metrics, as well as lower margins than property development and high operational and counterparty risks."
In a ratings action announced 7/15/20, Moody's assigned Ba2, the second rung of junk, to Greenland's rececent refinancing, expecting revenue to rise, but also the company to face higher interest expenses and weakening profit margins.
In a ratings action announced 7/15/20, Moody's assigned Ba2, the second rung of junk, to Greenland's rececent refinancing, expecting revenue to rise, but also the company to face higher interest expenses and weakening profit margins.
In an 8/5/20 credit opinion, Moody's affirmed Greenland's Ba1 corporate family rating, citing:
the company’s large scale, good geographic and product diversification in China; fast-growing construction business through both acquisitions and organic growth; and good access to funding, given its close link with the Shanghai government. A key constraint on Greenland Holding’s rating is its weak profit margins and interest coverage. We expect its EBIT/interest coverage to decline to 2.7x-2.8x over the next 12-18 months from 3.3x in 2019, mainly because of higher interest expenses and weakening margins. Its rating is also constrained by the execution risks associated with fast growth in its construction and other non-property businesses. Greenland Holding's refinancing needs are high over the next 12-18 months. Nonetheless, it has a good access to various funding channels, including banks and capital markets, to support its debt refinancing needs.That level of interest coverage, Moody's noted, "is weak for the Ba1 rating level."
Moody's noted that on 7/26/20, Greenland announced that the state-owned percentage could decrease to 28.87% from 46.37%, but said it expected Greenland "to continue to benefit from its close link with the Shanghai government and, therefore, maintain its strong funding access."
Greenland Holding operates in more than 80 cities in China and is one of the most diversified developers among the companies we rate in terms of the number of cities in which it operates. Such nationwide coverage mitigates the risk of exposure to regional economies.That makes Atlantic Yards/Pacific Park look small.
The company's land bank of 169 million square meters as of 31 December 2019 will be sufficient to support its property development plans over the next four years, according to our estimates.
Over the past two to three years, the company has introduced a new product line, high-speed rail new town, focusing on building integrated complexes with residential, commercial and office units, and hotels on large and medium-sized land lots adjacent to highspeed railway lines in some third- and lower-tier cities.
A chart noted that Greenland's revenue to debt had risen from 85% at the end of 2016--seemingly dangerous--to 137% at the end of 2019, an estimated 131% at the end of 2020, and 143% by the end of 2021.
The big picture
In an announcement 4/16/20, Moody's changes outlook on China property sector to negative; refinancing risk remains manageable for most, the firm said that "coronavirus-related disruptions and slowing economic growth are weighing on property demand and inventory levels, while offshore funding conditions will remain uncertain."
Still, the established developers "are generally well-positioned to withstand the weakened business conditions," said Celine Yang, a Moody's Assistant Vice President and Analyst.
Presumably that's what Greenland is banking on.
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