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Developer disputes downgrade

Update: March, 16/2012 - 10:17

HA NOI — Real estate developer Hoang Anh Gia Lai (HAGL) reacted on its website yesterday to the announcement by international credit ratings agency Fitch Ratings on the revision of HAGL's outlook from ‘stable' to ‘negative' due to the stagnation of the Vietnamese property market.

Fitch also rated HAGL's long-term foreign and local currency Issuer Default Rating (IDR) at ‘B'; downgraded HAGL's senior unsecured rating and its US$90 million bonds, issued in Singapore last year, from ‘B' to ‘B-'; and revised the recovery rating on the bonds to ‘RR5' from ‘RR4'.

The outlook revision reflected the higher credit risk HAGL has faced due to the sharp decline in property sales in HCM City.

"As a result, HAGL was saddled with completed but unsold inventory of VND3.5 trillion ($159 million) at the end of 2011," Fitch said. "In addition, the company's net debt increased to VND8.7 trillion at the end of 2011 from VND2.3 trillion a year earlier, following accelerated non-property related capex.

"This far exceeded Fitch's previous expectations and has worsened recovery prospects on HAGL's senior unsecured debt."

HAGL was addressing these problems, although it remained unclear whether these efforts would be sufficient to avert further deterioration in HAGL's financial profile, particularly in light of a VND1.1 trillion currently out-of-the-money convertible bond maturity in August 2013, Fitch said.

"HAGL has no plans to launch new property projects in the near term and instead is focusing on liquidating its existing inventory," the agency noted, adding that some of its non-property-related businesses had commenced operations and were likely to improve cash flow in 2012, including an iron mining investment.

Three of its 17 planned hydroelectric projects have begun generating power or were likely to come on-stream in 2012, and management remained committed to expanding its rubber plantation business.

"Fitch is only relying on book value to calculate the senior unsecured rating, and this is not reasonable," said HAGL deputy director Vo Truong Son. "Our rubber plantation and property holdings have market values much higher than book value, which Fitch did not consider. In fact, Fitch discounts these assets, which isn't illogical."

Son also complained that Fitch was viewing unsold properties as "completed" even though they were still listed on HAGL's books as uncompleted.

The inventory includes Block 5 of the Phu Hoang Anh project (first phase), which would begin sales in the first quarter of 2012, and the An Tien project, being projected to turn over in the third quarter of 2012. Other projects waiting on sales included the Phu Hoang Anh project (second phase) and the Thanh Binh and Hoang Anh Incomex projects.

"It's easy for HAGL to sell property to recover capital," Son said. "We don't need any pressure to force the sales. We believe in the efforts of the Government and the State Bank of Viet Nam to cut interest rates. When the rates are lower, demand will return and that will be a good time for sales.

"In terms of financial resources, HAGL had cash flow of nearly VND2.9 trillion ($131.8 million) at the end of 2011, and the company has arranged capital for projects" Son added. "We entirely believe that we are in a position to match investment progress with liquidity.

"We have overcome the impediments caused by the global economic crisis and continued operations," he added. "The last nine months of 2012 are not a big deal."

However, Fitch warned, "Further negative action might be taken if the company is not on track to meaningfully reduce property inventory or if, in any quarter this year, funds from operations fall below 2.0x interest coverage.

"The rating outlook may be revised to ‘stable' only when the company's property inventory has been substantially liquidated and the iron ore and hydropower businesses begin contributing meaningfully to the company. These events will alleviate current liquidity risks." — VNS

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