Landsea Green Management Limited -- Moody's downgrades Landsea's ratings to Caa1/Caa2; outlook remains negative
Rating Action: Moody's downgrades Landsea's ratings to Caa1/Caa2; outlook remains negativeGlobal Credit Research - 05 Sep 2022Hong Kong, September 05, 2022 -- Moody's Investors Service has downgraded Landsea Green Management Limited's corporate family rating (CFR) to Caa1 from B3 and its senior unsecured rating to Caa2 from Caa1.The outlook remains negative."The downgrade reflects Landsea's heightened liquidity and default risks, due to its weakened liquidity and operations, as well as a material amount of maturing debt," says Daniel Zhou, a Moody's Analyst."The negative outlook reflects the uncertainties over the company's ability to address its refinancing needs amid a tight funding environment," adds Zhou.RATINGS RATIONALELandsea has a material amount of debt maturing, particularly the USD165 million, or RMB1.2 billion equivalent, of an offshore bond maturing in October 2022. This bond accounted for around 15% of Landsea's total debt as of 30 June 2022. Moody's believes Landsea's weak liquidity is insufficient to address its repayment needs.Landsea's liquidity has deteriorated notably in the first half of 2022, as reflected by the sharp decline in its cash balance to RMB1.3 billion as of 30 June 2022, from RMB4.0 billion as of 31 December 2022. In addition, around half of such cash is held by Landsea's listed U.S. subsidiary, Landsea Homes Corporation (LHC), and cannot be mobilized by Landsea immediately.Landsea's operations in China have weakened because of the challenging industry environment. Its gross sales, including contribution from joint ventures (JV) and non-equity-holding development management projects, declined 51% year-on-year to RMB11.3 billion over the first six months of 2022.Landsea repaid the USD147 million offshore bond that matured in June 2022 by using internal cash and raising USD90 million in May 2022 through disposing of and pledging its shareholdings in LHC. However, Moody's estimates the company will need to raise further new funds to address its upcoming repayment needs, which entails high uncertainty given the weak market sentiment and tight funding conditions in China.Landsea's Caa1 CFR reflects its recognized brand in green property development and growing US operations, which support growth and offer geographic diversification. However, its Caa1 CFR is constrained by its high refinancing risk, low financial flexibility in accessing project-level cash due to its asset-light business model, small operating scale and narrow funding channels.The Caa2 senior unsecured debt rating is one notch lower than the corporate family rating due to structural subordination risk. This subordination risk reflects the fact that the majority of Landsea's claims are at the operating subsidiaries and have priority over claims at the holding company in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination.Consequently, the expected recovery rate for claims at the holding company will be lower.In terms of environmental, social and governance (ESG) factors, Moody's has considered Landsea's concentrated ownership by its key shareholder, Mr. Tian Ming, who held a stake of approximately 58.28% (direct and indirect) in Landsea as of 31 December 2021.Moody's has also considered the presence of three independent nonexecutive directors on the company's seven-member board and other internal governance structures and standards as required by the Hong Kong Stock Exchange.Landsea's heavy reliance on JVs exposes the company to greater governance risk, as this weakens its corporate and financial transparency.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade is unlikely, given the negative outlook.However, Moody's could return the outlook to stable if Landsea improves its operating cash flow, liquidity and access to funding over the next 12-18 months.On the other hand, Moody's could downgrade the ratings if Landsea's liquidity deteriorates further.The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66220. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Landsea is a property developer and development and management services provider in China and the US that specializes in green property projects. Landsea had total land reserves of 6.2 million square meters on a gross basis across 35 cities in China and six states in the US as of June 2022.The company listed its shares in Hong Kong through a reverse IPO in 2013, after acquiring Shenzhen High-Tech Holding Limited. As of 31 December 2021, it was 58.28% owned by its founder, Tian Ming.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating. Yiwei Daniel Zhou 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.) 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