Fitch Ratings has downgraded China-based homebuilder Redco Properties Group Ltd's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CC' from 'CCC-'.

Fitch has also downgraded the senior unsecured ratings to 'CC' from 'CCC-', with the Recovery Ratings remaining at 'RR4'.

The downgrades follow Redco's weakened liquidity and heightened debt servicing risk to its short term capital market maturities. In addition, there have been market news reports that the company missed an interest payment due in August and the 30-days grace period has expired.

Fitch was unable to verify the non-payment of interest and the company has not provided further information to Fitch beyond the public announcements.

Fitch is withdrawing the ratings as Redco has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings. Accordingly, Fitch will no longer provide ratings or analytical coverage for Redco.

Key Rating Drivers

Uncertain Bond Interest Payment: Redco has not made any public statements in response to market news that the company missed an interest payment due on 6 August 2022 on its REDPRO 11.0% US dollar notes maturing in August 2023. Fitch was unable to verify the accuracy of this news.

Heightened Debt Servicing Risk: We believe that the company may not be able to access the capital market in the short term and expect it to rely on cash on hand and internal cash flow to address upcoming maturities in 2023. Redco at end-June 2022 had unrestricted cash of CNY2.9 billion (excluding restricted cash of CNY5.5 billion), which was insufficient to cover its short-term borrowings of CNY6.7 billion, including senior notes of CNY3.1 billion due in a year.

Weak Contracted Sales: Redco's total contracted sales fell by 39% yoy in 8M22 to CNY17.9 billion. We believe sales recovery remains uncertain in the near term. The weak sales will continue to hamper the company's cash flow generation and build-up of its liquidity buffer.

Derivation Summary

Redco's ratings reflect the increasing debt servicing risks amid market reports about its non-payment of the bond interest.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Deteriorating contracted sales in line with negative market sentiment;

No land acquisitions.

KEY RECOVERY RATING ASSUMPTIONS

The recovery analysis assumes that Redco would be liquidated in a bankruptcy because it is essentially an asset-trading company.

We have assumed a 10% administrative claim in line with criteria.

We use a multiple assumption tool to derive a 4x EBITDA multiple to estimate the going-concern value. The nature of homebuilding means the liquidation value approach always results in a much higher value than the going-concern approach.

Liquidation Approach

The liquidation estimate reflects Fitch's view of the value of balance-sheet assets that can be realised in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.

80% advance rate applied to accounts receivable. This treatment is in line with our recovery rating criteria.

20% advance rate applied to investment properties. Redco's investment property portfolio mainly consists of commercial buildings in Tier 2 and Tier 3 cities and has an implied yield of 1%-2%. We consider a 20% advance rate as appropriate because the implied rental yield on the liquidation value of the portfolio would improve to 6%, which would be considered acceptable in a secondary market transaction.

50% advance rate applied to property, plant and equipment, which mainly consist of buildings, the value of which is insignificant.

56% advance rate applied to net inventory. Redco's inventory mainly consists of completed properties held for sales, properties under development (PUD) and deposits/prepayments for land acquisitions. Different advance rates were applied to these different inventory categories to derived the blended advance rates for net inventory

70% advance rate applied to completed properties held for sale. Completed commodity housing units are closer to readily marketable inventory. Redco's gross margin was 10%-15% in 1H22, which is a similar level to the industry. Therefore, an advance rate of 70% was applied.

50% advance rate applied to PUD. Unlike completed projects, PUD are more difficult to sell. These assets are also in various stages of completion. A 50% advance rate was applied. The PUD balance - prior to applying the advance rate - is net of margin-adjusted customer deposits.

50% advance rate applied to joint venture (JV) net assets. JV assets typically include a combination of completed units, PUD and land bank. A 50% advance rate was applied in line with the baseline advance rate for inventories.

0% advance rate applied to excess cash. China's homebuilding regulatory environment means that available cash, including pre-sales regulated cash, is typically prioritised for project completion which includes payment for trade payables. Net payables (trade payables - available cash) are included in the debt waterfall ahead of secured debt. However, we do not assume available cash in excess of outstanding trade payables would be available for other debt servicing purposes and therefore the advance rate for excess cash is 0%.

The allocation of value in the liability waterfall results in recovery corresponding to 'RR1' for the senior unsecured offshore bonds. However, the Recovery Rating is capped at 'RR4' because, under Fitch's Country-Specific Treatment of Recovery Ratings Criteria, China falls into Group D of creditor friendliness, and instrument ratings of issuers with assets in the group are subject to a soft cap at the issuer's IDR.

RATING SENSITIVITIES

Rating sensitivities are not applicable, given the withdrawal of the ratings.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Tight Liquidity: Redco at end-June 2022 had unrestricted cash of CNY2.9 billion (excluding restricted cash of CNY5.5 billion), which is insufficient to cover its short-term borrowings of CNY6.7 billion, including senior notes of CNY3.1 billion due in a year.

Issuer Profile

Redco, founded in 1992 as a construction and decoration business, has ventured into property sales, and construction and project-management services. Property sales accounted for over 90% of the company's revenue in 2020 and 2021.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Redco has an ESG Relevance Score of '4' for Financial Transparency due to a lack of disclosure relating to a possible non-payment of interest and its debt servicing plan, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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