Standard & Poor's Ratings Services has downgraded its outlook for mainland developer Evergrande Real Estate from stable to negative, noting the group may face a tougher refinancing environment following allegations of fraud by Citron Research.
The ratings firm yesterday said that while it revised the outlook to negative from stable it affirmed a 'BB' long-term corporate credit rating on the firm and a 'BB-' on its outstanding senior unsecured notes. As a result, it cut its Greater China credit scale rating on Evergrande to 'cnBB+' from 'cnBBB-' and on notes to 'cnBB' from 'cnBB+'.
S&P credit analyst Christopher Lee said in his commentary that Evergrande may face a tougher refinancing environment following allegations of fraud by the US-based investment research firm. 'Evergrande's corporate governance assessment could deteriorate if the company continues to materially invest in non-core businesses and pursues a high-growth strategy,' he said.
Citron issued a report on June 21 saying Evergrande was insolvent and would be severely challenged from a liquidity perspective this year. It identified six alleged cases of accounting misstatements, in which it said Evergrande had either overstated assets or understated liabilities.
It estimated the pro forma equity of Evergrande should be negative 36 billion yuan (HK$44.2 billion).
S&P said the equity and bond prices of Evergrande had weakened since Citron's report was made public on June 22. Confidence in Evergrande may take time to recover, it noted, and lenders and investors may demand higher funding costs until the company can achieve a good financial performance.
It said it believed Evergrande may be diverting resources away from its core business in property development by increasing its investments in non-property businesses.
Evergrande's total investments in sports and entertainment could increase to 800 million yuan in 2012 from 450 million yuan a year ago, with losses of about 200 million yuan.
S&P said it may revise the outlook back to stable if market confidence in the group recovered, as reflected in securities prices and funding costs, and there were no further negative developments alleging fraud or misrepresentation for the next 12 months. It may also revise the outlook to stable if the firm's financial performance was good and it maintained leverage in line with its base-case scenario for the next 12 months.
Evergrande chairman Hui Ka-yan bought a total of 15.2 million shares in the company for about HK$60.8 million on June 27 and 28. His interests have increased from 67.79 per cent to 67.89 per cent.
The group's share price closed up 0.51 per cent on the day at HK$3.93 yesterday.