OREANDA-NEWS. S&P Global Ratings said today that it had affirmed its 'CCC+' long-term corporate credit rating on China-based real estate developer Mingfa Group (International) Co. Ltd. At the same time, we affirmed our 'CCC' long-term issue rating on the company's outstanding senior unsecured notes. We also affirmed the long-term Greater China regional scale rating on Mingfa and the notes at 'cnCCC+' and 'cnCCC', respectively. We removed all the ratings from CreditWatch, where we had placed them with negative implications on April 6, 2016. The outlook on the long-term corporate credit rating is negative.

"We affirmed the ratings and resolved the CreditWatch status given our view that Mingfa's track record of refinancing and improved sales performance so far this year has somewhat tempered imminent risks for the company," said S&P Global Ratings credit analyst Esther Liu.

The outlook is negative, reflecting our expectation that Mingfa still faces heightened refinancing risk over the next six to 12 months due to its large short-term maturities, potential negative impact from an investigation into its financial reporting, and unsustainable leverage.

Mingfa relies highly on rolling over its short-term borrowings, which have consistently accounted for 70%-80% of its total debt over the past few years. As of Dec. 31, 2015, Mingfa had short-term borrowings of Chinese renminbi (RMB) 9.7 billion, compared with an unrestricted cash balance of only about RMB1.9 billion.

"Mingfa's refinancing risk could increase over the next 12 months because of its unsustainable leverage, which requires further debt to finance," said Ms. Liu.

We expect Mingfa's leverage will remain high given its considerable construction expenditure to support sales. Mingfa's debt-to-EBITDA ratio will be above 15x in the next 12 months under our base-case scenario. In addition, our expectation that its EBITDA interest coverage will be around 0.7x in 2016 also indicates weak debt-servicing capability.

The investigation into Mingfa's financial reporting issues also constitutes a potential risk to its operations and refinancing. The release of the results of the investigation and the company's 2015 annual report has been delayed several times. The company now expects this to conclude in August 2016. In our view, the postponement may reflect ongoing difficulties in resolving the reporting issues.

Nevertheless, Mingfa's banking relationships and significantly stronger sales performance temper the above risks. We also expect the benign property market conditions in Nanjing and Hefei to help Mingfa further improve sales, which should somewhat alleviate the company's liquidity risks.

We also believe further negative impact from the investigation into and delayed publication of its financial reporting might not be as significant as previously expected, because the transactions between Mingfa and certain potentially related parties have already been excluded from the results released on April 1, 2016.

We continue to assess the management and governance of Mingfa as weak, mainly to reflect our concerns over the transparency of the company's financial reporting, and weak internal controls demonstrated by delays in information disclosure due to delays in the investigation.

We see Mingfa's liquidity as weak because we expect the company's sources of liquidity to be materially deficient compared to its uses over the next 12 months. Mingfa could face liquidity pressure if it cannot refinance its short-term borrowings, in our view.

We could lower the rating if Mingfa has difficulties rolling over its short-term borrowings or does not obtain new financing from lenders to improve its maturity profile. We could also lower the rating if we believe that the investigation into its financial reporting issues has any negative impact on the company's operations or refinancing ability.

We could revise the outlook to stable if Mingfa improves its liquidity position. This could happen if the company successfully refinances its short-term borrowings and extends its debt maturity. At the same time, the company would need to satisfactorily resolve its financial reporting issue such that we believe its operations and refinancing would not be negatively impacted.