Rating Action: Moody's downgrades Jiangsu Nantong Sanjian Construction to Caa2; outlook remains negative
Global Credit Research - 02 Sep 2020
Hong Kong, September 02, 2020 -- Moody's Investors Service has downgraded Jiangsu Nantong Sanjian Construction Group Co., Ltd.'s (JNTC) corporate family rating (CFR) and the senior unsecured rating on the bond issued by Jiangsu Nantong Sanjian International Co., Ltd. and guaranteed by JNTC to Caa2 from Caa1.
The ratings outlook is negative.
The rating action follows the announcement of JNTC's debt exchange offer on 31 August 2020, in which the company proposed to exchange 20% of the principal amount on its $300 million offshore bond -- maturing in October 2020 with a 7.8% annual coupon -- with cash. The remaining 80% will be exchanged with new notes due in 2022 with an annual coupon of 10.0%.
"The downgrade reflects JNTC's very weak liquidity and the uncertainty around the completion of its exchange offer," says Roy Zhang, a Moody's Associate Vice President and Analyst.
Moody's considers JNTC's debt exchange offer as a way to avoid default, given its very weak liquidity profile. The offer can therefore be viewed as a distressed exchange, which is a default under Moody's definition.
JNTC's Caa2 CFR reflects the company's high refinancing pressure and reliance on substantial external financing to cover its funding needs. It has insufficient cash on hand and operating cash flow to cover its repayments coming due over the next 12 months.
The company's weak liquidity profile is counterbalanced by its established market position, operational track record, good revenue visibility, stable margins and diversified client base.
From a governance perspective, the ratings factor in (1) the company's concentrated ownership in Nantong Sanjian Holdings, which held a 73.05% stake at the end of December 2019; (2) JNTC's weak reporting and disclosure requirements; (3) the presence of large amounts of connected transactions and intercompany borrowings, and (4) JNTC's weak financial management.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects Moody's concerns over JNTC's weak liquidity and ability to arrange funding on time to meet its refinancing needs, which could lead to low recovery prospects for lenders.
Moody's could upgrade JNTC's ratings if the exchange is completed, and the company's liquidity risk is reduced.
On the other hand, Moody's could further downgrade the rating if the company fails to meet its obligations.
The principal methodology used in these ratings was Construction Industry published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Jiangsu Nantong Sanjian Construction Group Co., Ltd. (JNTC), headquartered in Haimen, Jiangsu Province, is a privately-owned engineering contractor in eastern China. The company's revenue for 2019 was around RMB24.8 billion.
As of the end of December 2019, the company was 73.05% owned by Nantong Sanjian Holdings, which is in turn majority owned by its founders and 13.22% owned by Haimen City Development and Construction Co., Ltd., under the Haimen State-Owned Assets Supervision and Administration Commission.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Roy Zhang Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Clement Cheuk Yiu Wong Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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