Yuzhou downgrade by Moody’s: Price action seems excessive

On March 23, Moody’s downgraded Yuzhou to B1 from Ba3 and assigned a Negative outlook. The action followed a profit warning issued by the company on March 21, in which Yuzhou outlined that delays in the delivery of some of its projects will lead to the deferral of a portion of revenues by 1-2 years. The reaction in the bonds was strongly negative, likely additionally fueled by unconfirmed market rumors, with the papers’ yields rising by ~530-1,000 bps as of end March 26 compared with last Friday’s close. While we cannot justifiably judge whether the pricing correctly responded to the rumors, a fact-based analysis suggests that the price action was overly negative, which may offer an attractive entry opportunity for risk-acceptant investors.