Powerlong’s contract sales disappointing at RMB2.3b in 1H 2011

Moody's Investors Service says that Powerlong Real Estate Holdings Limited's new private debt placement of HK$ 1 billion will not impact its corporate family rating of Ba3 and its negative outlook.

The proceeds from the 3-year senior notes will be used to finance existing and new property projects and for general working capital purposes.

Through this new debt, Powerlong will improve its liquidity position, which has been weakened by lower contract sales and land payments of RMB 2.9 billion in 1H 2011. Its cash balance declined to RMB 2.7 billion as of 30 June 2011 from RMB 4.0 billion at end-2010.

Powerlong recorded RMB2.3 billion in contract sales in 1H 2011, and which are below expectations. Nevertheless Moody's expects the company to improve contract sales in 2H 2011 as it will increase its available projects to 12 from 7.

This expectation is supported by the consideration that Powerlong's commercial properties are less affected by the purchases restrictions imposed by the government.

Although the new private debt placement will weaken interest coverage to 2.9x from Moody's original forecast of 4.8x in 2011, such a level still supports the current rating of Ba3, although marginally. Moody's expects deleveraging by Powerlong to bring the interest coverage back to above 3x -- 4x in 2012 -- 2013.

Moreover, further significant increases in Powerlong's debt leverage are unlikely in the near term, given the tightening credit policy evident in China.