Greenland, with significant debts, still rated junk, and stock dips. But one ratings agency suggests a positive outlook.

I wrote last August that Greenland Holding Group, whose subsidiary Greenland USA is the master developer of the Atlantic Yards/Pacific Park project. had risen steadily in the annual Fortune Global 500 ranking and Forbes Global 2000 ranking, suggesting a general wave of good news.

The picture, though, was more mixed, given reason for wariness about aggressively expansive Chinese real estate companies, with notably high debt loads, which meant Greenland's credit rating had gone from investment-grade to junk.

In another mixed result, as I just reported, Greenland rose in the Fortune listing but dropped back in the Forbes listing, which assesses broader metrics.

Greenland stock price, WSJ screenshot

This year add a lagging stock price, barely half it was a year ago, as shown in the screenshot at right.

So it's no surprise that recent reports from ratings agencies are generally--but not fully--pessimistic toward Greenland. That said, there's also reason for optimism, as described below.

Note: Greenland is significantly owned by the government of Shanghai as well as being publicly traded.

Moody's 2020

On 11/17/20, Moody's Investor Service announced completion of a periodic review of ratings of Greenland Holding Group Company Limited. 

It was not a credit rating action and assumed the Ba1 rating--continuing from a 2016 downgrade to "junk's status--persists. Note that Ba1 is the highest level of junk.

The summary:

Greenland Holding Group Company Limited's Ba1 corporate family rating considers the company's large scale, good geographic and product diversification in China (A1); fast-growing construction business through both acquisitions and organic growth; and good access to funding, given its close link with the Shanghai government.

Greenland Holding's rating is constrained by its weak profit margins and interest coverage, and the execution risks associated with fast growth in its construction and other non-property businesses.

Indeed, the weak profit seems part of why the Forbes Global 2000 rating went down. As to "execution risks," well that's part of ambitious construction plans. Remember how, in 2013, Greenland's CEO unwisely suggested Atlantic Yards could be finished in eight years?

Fitch 2020

On 11/4/20, Fitch Ratings Affirms Greenland at 'BB-'; Outlook Stable, which means their third-highest level of junk. From the statement:

Greenland's rating is based on the weighted-average credit profile of its two core business segments - property development and construction. Its rating encompasses a 'bb-' category for the property segment, reflecting its size as one of the top-10 property developers in China by contracted sales although its high leverage continues to constrain the segment's profile. Its rating also reflects the 'b' credit profile of its expanding engineering and construction (E&C) segment, which is one of the top Chinese E&C businesses by revenue although it has high leverage and weak cash flow generation.

In other words, Greenland's property business is somewhat more stable. 

Fitch noted that Greenland's property development leverage, around 60% by end-2020, was slightly higher than the previous year, while competitors had leverage below 50%, with commensurate higher ratings. Greenland's cash collection rate rose to above 90%, from around 80% in the previous four years, and its various businesses were expected to grow. 

Fitch suggested that a lowering of debt or stronger support from the company's parent could lead to an upgrade, while increased debt could lead to a downgrade.

Interestingly enough, in an announcement 7/29/21, Fitch Plans to Withdraw Ratings of Greenland Holding Group, the company said it would withdraw ratings by the end of August, "for commercial reasons."

That wasn't explained, but, given that issuers pay for ratings, it's possible that Greenland prefers rating agencies that assess the company more positively than did Fitch.

S&P 2020-21

S&P Global Ratings, in a 7/13/20 China GRE Rating List, assessed 90 government-related entities (GREs) in China. These include GREs held by the Chinese central government as well as local and regional governments.

As noted in the screenshots below, S&P's rating of Greenland is BB (second level of junk), while it's SACP (stand-alone credit profile) is the same, with no uplift from its related Shanghai governmental ownership.  

Note that S&P judged a low "likelihood of sufficient and timely extraordinary government intervention in support of the GRE's ability to meet its financial obligations." 

An update dated 1/14/21 kept the same assessment but noted Greenland was one of only two rated GREs with a positive outlook.

Rough times for developers

In a separate 11/12/20 report titled China Property Watch: Issuers Go On A Debt Diet, S&P noted that government measures to cool China's residential market should result in a 5% drop in home prices in 2021, with sales likely flat on increased volumes.

S&P estimated that only 6.3% of rated Chinese developers could comply with the government-imposed so-called "three red lines" measuring an issuer's fitness to borrow, constraining debt growth. Those metrics are: net debt to equity; liabilities to assets; and unrestricted cash to short-term debt.

An update from S&P

S&P's China GRE Ratings List, published at the end of 2020, again stated that "only 6.3% of rated Chinese developers can comply with the so-called 'three red lines.'"

Greenland Holdings was not among the 6.3%, S&P confirmed in response to my query. S&P said Greenland had breached all three red lines as of end-2020, but the company announced it has complied with one of the red lines since February.

Regarding contract liability as a percentage of reported debt, an S&P chart including 50 companies shows Greenland 12th best on the list.

Another S&P chart, regarding the size of land banks, shows Greenland the third-best situated among the companies.

A caution about Evergrande

That contract liability chart shows the company Evergrande in the absolute worst position. According ton an 8/10/21 New York Times article, Evergrande Went From China’s Biggest Developer to One of Its Worst Debtors:

China has a special term for companies like Evergrande: “gray rhinos,” so large and so entangled in the country’s financial system that the government has an interest in their survival. A failure on the scale of Evergrande would ripple across the economy, and spell financial ruin for ordinary households.

During the boom years, Evergrande was China’s biggest developer, creating economic activity that officials came to depend on while the country opened up. As more people were lifted out of poverty, home buyers put their money into property. Feeling flush and eager to expand, Evergrande borrowed money to dabble in new businesses like a soccer club, bottled water and, most recently, electric vehicles.

Now Evergrande epitomizes the vulnerability of the world’s No. 2 economy. It owes more money than it can pay off, and officials in Beijing want it to slow down. Its stock price has lost three-quarters of its value in the past year, and creditors are panicking. The company has started selling off parts of its corporate empire, but to survive Evergrande needs to keep selling its apartments.

This is not directly applicable to Greenland, which is in a better, if not solid, financial situation. But it's a reminder that seemingly deep-pocketed companies may have less money at hand. From the Times:

Fearing a housing bust that would ricochet through China’s financial system, the central bank created “three red lines,” rules forcing property companies to get their debt levels down before they could borrow more money. The aim was to limit the banking sector’s exposure to the property market. But it also took away funds they could use to finish projects.

To comply, Evergrande has started to sell off some of its businesses.

Why exactly did Greenland USA--which controls Greenland Forest City Partners--lease three Atlantic Yards/Pacific Park sites to TF Cornerstone and The Brodsky Organization, and partner with Brodsky on another tower. 

Well, that spreads its risk, and raises funds for infrastructure, like the permanent railyard and deck.