KUALA LUMPUR (April 29): RAM Rating Services Bhd has revised its outlook to negative from stable on the AA3(s) rating of Hong Kong-based Country Garden Holdings Co Ltd's Malaysian subsidiary Country Garden Real Estate Sdn Bhd (CGRE).

This follows "an unexpected spike in the debt load of Country Garden in the second half of 2015 (2H15) for land purchases that represented a significant deviation from management's guided level", thus leading to a deterioration in the group's financial metrics, RAM said in a statement today.

The rating outlook on CGRE could revert to stable if Country Garden's operating cashflow debt cover recovers to a sustainable minimum of 0.3 times, and its adjusted net gearing ratio eases to 0.7 times or lower.

To meet these thresholds, Country Garden may have to noticeably improve further its operating cash cycle even if its sales targets are met, said RAM.

"The issue rating reflects unconditional and irrevocable corporate guarantees extended by Country Garden, Bright Start Group Ltd and Top Favour Holdings Ltd on a joint and several basis to CGRE's Islamic Medium-Term Notes Programme of RM1.5 billion in Nominal Value (2015/2035)," it said.

Therefore, the issue rating reflects the credit linkage to Country Garden (as the strongest obligor) and the credit fundamentals of the group.

Further, contrary to RAM's expectations of a more measured approach, Country Garden is "ramping up its expansion pace", boosted by property launches following aggressive land acquisitions in 2015.

The group is also shifting more of its focus onto property projects in tier-1 and tier-2 cities in China, with 75% of its enlarged land purchases in 2015 and the bulk of its new project launches this year being in those cities.

Though this stronger push into tier-1 and tier-2 cities, which has shown some success, remains in line with the group's efforts to achieve a more balanced property portfolio, RAM is concerned the group's financial metrics may not recover sufficiently in the near term amid elevated debts and lower operating margins.

As at end-December 2015, Country Garden's adjusted net gearing ratio grew to 0.92 times, exceeding RAM's previous expectation of 0.6 times.

Debts rose in 2H15 due to land buys, thus almost doubling the total outlay for land banking to RMB37 billion (about RM22 billion) last year from its budgeted RMB20 billion.

"Together with RMB16.5 billion of perpetual capital securities raised in December for an acquisition that had fallen through, the group's debt burden surged RMB45 billion (+70% year-on-year) to RMB109.3 billion.

"This debt level exceeded substantially our expectation and was a departure from our understanding that greater financial discipline had been instilled," it said.