OREANDA-NEWS. S&P Global Ratings said today that it had placed its 'BBB' long-term corporate credit rating and its 'cnA-' long-term Greater China scale rating on Yuexiu Real Estate Investment Trust (Yuexiu REIT) on CreditWatch with negative implications. At the same time, we placed our 'BBB' and 'cnA-' long-term issue ratings on the China-based REIT's outstanding senior unsecured notes and guaranteed medium-term notes program on CreditWatch with negative implications.

"We placed the ratings on CreditWatch because the REIT has yet to undertake a debt-reduction exercise that we had earlier expected," said S&P Global Ratings credit analyst Matthew Chow. "In addition, the REIT has not finalized the refinancing of its Hong Kong dollar (HK$) 2.85 billion offshore bank loan, which matures on Dec. 19, 2016. This debt maturity could adversely affect our current adequate liquidity assessment for the REIT."

In our view, Yuexiu REIT's operating strategy of endeavoring to deleverage the balance sheet is being tested, as no debt-reduction action has materialized since our revision of the rating outlook to negative from stable on Feb. 26, 2016. The REIT's debt leverage credit metrics weakened following its debt-funded acquisition last year of Hongjia Tower, a commercial property in Shanghai. The company has breached our rating trigger of a ratio of funds from operations to debt of 9%.

We had expected the REIT to deleverage through either the issuance of new equity units or asset sales, but these have yet to happen. Considering the prevailing capital market conditions, we believe that it has become increasingly difficult for the REIT to issue new units. In our view, the REIT's willingness to deleverage seems to have decreased, given the lack of progress.

We believe that Yuexiu REIT's solid operating performance should support its ability to obtain refinancing from the banks. In its 2016 interim results, Yuexiu REIT continued to demonstrate stable organic rental growth of 6%, which excludes the contribution of Hongjia Tower. The company's overall occupancy rate for its portfolio has also stayed high at 98%.

However, we generally assess liquidity positions on a 12-month basis, while a six-month basis is also possible for investment-grade issuers. As such, the fact that Yuexiu REIT is not refinancing in a timely manner will put pressure on our liquidity assessment of the REIT. Even if an asset sale materializes, it will unlikely be enough for adequate liquidity assessment as the maturing offshore bank loan's size is much bigger. For issuers with less-than-adequate liquidity, the stand-alone credit profile is capped at 'bb+'. We will therefore need to seek more clarity and details about the finalization of the refinancing of the forthcoming debt maturity.

"We aim to resolve the CreditWatch within the next three months when we have more information about the progress of deleveraging and greater clarity on the liquidity and refinancing situation for the HK$2.85 billion offshore bank loan," said Mr. Chow.

We could lower our rating on Yuexiu REIT by one notch if the trust fails to deleverage. The downgrade could be two notches if the REIT cannot undertake satisfactory refinancing of the pending debt maturity three months before the maturity date, which would result in our assessment that the REIT's liquidity is less than adequate.

We could affirm the rating if Yuexiu REIT expedites the deleveraging process to fully restore its financial position to a level commensurate with a 'BBB' rating, and arranges the refinancing of the offshore bank loan in a timely manner.