OREANDA-NEWS. Fitch Ratings has assigned Sino-Ocean Land Treasure Finance II Limited's USD700m 4.45% senior unsecured guaranteed notes due 2020 and USD500m 5.95% senior unsecured guaranteed notes due 2027 a final rating of 'BBB-'. The issuer is a wholly owned subsidiary of Sino-Ocean Land Holdings Limited (Sino-Ocean Land), a China-based real estate developer.
The notes are rated at the same level as Sino-Ocean Land's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 28 January 2015.

In rating Sino-Ocean Land, Fitch has applied the bottom-up approach detailed in its Parent and Subsidiary Rating Linkage Criteria. Sino-Ocean Land is rated two notches higher than its standalone rating of 'BB' to reflect its importance to its major shareholder China Life Insurance Company Ltd. (China Life; Insurance Financial Strength rating of A+/Stable)

Sino-Ocean Land's standalone ratings are supported by its strong focus and leading position in targeted Tier 1 and 2 cities in China, experienced management team with proven track record and diversified funding channels. The ratings are constrained by its scale and diversification. In addition, Sino-Ocean Land's leverage, as measured by net debt/adjusted inventory, was 37.5% at end-2013, which was high compared with its peers.

KEY RATING DRIVERS

Strategic Arm for China Life: Sino-Ocean Land is of high strategic importance to China Life, which has positioned Sino-Ocean Land as its sole strategic real estate investment platform in China. It increased its stake in the developer from 16.57% in 2009 to 29% at present and is committed to own no less than 25%. China Life also signed an agreement with Sino-Ocean Land to cooperate to exploit synergies in their insurance and real estate businesses. Although China Life has provided a written undertaking to support Sino-Ocean Land under certain circumstances, this undertaking is not legally binding, and thus, is not a major factor in Sino-Ocean Land's final rating.

Strong Focus on Tier 1 and 2 Cities: Most of Sino-Ocean Land's 22.43m sqm of land bank are located in Tier 1 and 2 cities - land in these cities make up 73% of the company's total land bank by GFA and 92% by value in 1H14. In addition, the company has been the market leader in key cities, namely Beijing and Tianjin, Zhongshan and Dalian, in the past three years. These cities together accounted for 67% and 59% of contracted sales and 61% and 53% of contracted GFA in 2012 and 2013 respectively. As a result of its focus on these cities, the company's contracted sales rose around 15% in each of the past four years.

Slow Churn; Moderate Margins: For the past four years, Sino-Ocean Land was able to maintain a moderate EBITDA margin of around 23%-27% given it focused on mass market products and had a slower churn rate. For the same period, around 60%-74% of Sino-Ocean Land's contracted sales were from smaller units of 70-150sqm and total contracted sales to total debt was around 0.7x to 1x. Fitch expects this trend to continue for the next two to three years.

Higher Leverage Than Peers: Sino-Ocean Land's leverage, as measured by net debt/adjusted inventory, was decreasing - it dropped to 37.5% in 2013 and 46.5% in 2012 from 54.5% in 2011 - but has increased to 44.7% at end-June 2014. This is still higher than its peers' leverage. However, given its diversified funding channels, Sino-Ocean Land maintained a lower funding cost, with effective interest rate of around 6.5%-7% in the past three years

Sufficient Liquidity: At June 2014, Sino-Ocean Land had CNY11.8bn cash and CNY4.9bn restricted cash. Fitch expects the group to maintain sufficient liquidity to fund development costs, land premium payments and debt obligations during 2014-2016 due to its diversified funding channels from both onshore and offshore capital markets, long-term relationships with onshore and offshore banks and flexible land acquisition strategy.

Limited Scale: Sino-Ocean Land's rating is constrained by its geographical concentration in the four key cities namely Beijing, Tianjin, Dalian and Zhongshan, its limited contracted sales scale, lower ratio of total contracted sales to total debt (2013: 0.95x; end-June 2014: 0.57x) compared with similarly rated peers, and its limited recurring EBITDA interest coverage (2013: 0.05x).

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- EBITDA margin sustained below 20% (2013: 20.0%; end-June 2014: 23.4%)
- substantial decrease in contracted sales
- net debt/adjusted inventory rising close to 50% (2013: 37.5%; end-June 2014: 44.7%)
- contracted sales/total debt sustained below 0.8x
- evidence of weakening linkage with China Life

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- evidence of strengthening linkage with China Life
- There is no immediate positive rating pressure on the standalone rating given the limited scale and diversification of the company