OREANDA-NEWS. Fitch Ratings says Hydoo International Holding Limited's (Hydoo: B-/Stable) proposed issuance of an additional USD60m of its 13.75% senior notes due 2018 will not affect the existing 'B-' rating and Recovery Rating of 'RR4' on the bond.

The proposed and existing bonds are rated at the same level as Hydoo's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. Hydoo's ratings are constrained by its weak performance as a result of the difficult operating environment for the trade centre industry. Hydoo's ratings are supported by its large land bank that allows it to keep leverage under 50%.

Sales from Hydoo's trade and logistics business have further weakened due to SMEs scaling down new investments, slower relocation demand, local government delays in completing transport networks and lower investor appetite for commercial properties. Contracted sales fell 41% yoy and 11% from the preceding six months to CNY1.1bn in 1H16. Residential property sales increased to CNY294m in 1H16 from CNY30m in 1H15, but the contribution to sales remained small. Fitch expects contracted sales to slow to CNY2.5bn-3bn in 2016 as there is no sign of a recovery in trade centre sales.

Hydoo's trade centres are mainly in Tier 3 and Tier 4 cities spread across 10-12 cities to tap relocation and urbanisation demand. Fitch believes sales are more volatile in these cities than in more developed cities, and demand may reach saturation faster due to the smaller populations and GDP in these economies. Sales for the subsequent phases of Hydoo's large-scale integrated trade centre projects (those that are 400,000 square metres or larger) would hinge on continued urbanisation, which may slow because of greater market uncertainty.

Hydoo's liquidity is tight with unrestricted cash balances of CNY794m at end-1H16, which covers only 44% of short-term debt of CNY1,195m plus the USD80m outstanding convertible bond with Pingan Real Estate Capital Limited with early redemption starting January 2016. Hydoo's recent offshore refinancing activities to repay the convertible bond have relieved the short-term liquidity pressure. However, Hydoo's liquidity will remain tight, as banks are becoming more stringent on new facilities and Hydoo has no big onshore entity to access to the onshore bond market.

Hydoo's leverage deteriorated quickly to 39% at end-1H16 from 25% at end-2015 and a net cash position at end-2014 because of slower sales, continued capex and increasing restricted cash pledged for bills payables. Fitch expects Hydoo to keep leverage under 50% in the next two years after considering Hydoo's plan to reduce its construction pace and land acquisitions. Hydoo's large land bank of 11 million sqm available for future development gives it flexibility in cutting land purchases.