Logan and Zhenro Downgraded to Ba3 and B3 by Moody’s

Logan Group was downgraded to Ba3 from Ba2 due to weakened funding access and insufficient internal control over its contingent liabilities. Similar to Fitch’s downgrade last week to BB-, Moody’s cited the developer’s revelation of an undisclosed private guaranteed debt that was not on Logan’s balance sheet, and previously not stated in its contingent liabilities. This has weakened  Logan’s access to offshore funding channels alongside the existing weak market sentiment. Moody’s expects contracted sales to decline to ~RMB 105-110bn ($16.5-17.3bn) in 2022 from RMB 140bn ($22bn) in 2021. Also, a majority of Logan’s claims are at its operating subsidiaries and have priority over claims at the holding company in a liquidation scenario, thereby indicating structural subordination.

Logan’s dollar bonds are down over 4 points – its 7% Perp is down 4.75 points to 61.9 cents on the dollar.

Zhenro Properties was downgraded by two notches to B3 from B1 by Moody’s and its senior unsecured ratings to Caa1 from B2. Zhenro’s deteriorating operations after contracted sales fell materially by 41% and 30% YoY in December 2021 and January 2022 combined with weak funding access will weaken its credit metrics. Moody’s expects Zhenro’s EBIT interest coverage ratio to reduce to 1.4x from 1.8x and its debt leverage (revenue/adjusted debt)  to worsen to 40-45% from 48% over the next 12-18 months. Besides, Zhenro’s high exposure to JVs and the latest concerns on redeeming its bonds will make access to new funds difficult.

Separately, Zhenro denied news rumors that its controlling shareholder was forced to sell some shares. Bloomberg analysts note that Zhenro might buy back some of its $200mn 10.25% Perps after the price dropped over 60 points last week. Zhenro’s 10.25% Perp was continues to trade at distressed levels of 32.5 cents on the dollar.