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Rating Action:

MOODY'S ASSIGNS FIRST-TIME (P)B1 BOND/ (P) Ba2 CFR RATINGS TO CHINESE FUTURE; OUTLOOK STABLE

18 Nov 2005
MOODY'S ASSIGNS FIRST-TIME (P)B1 BOND/ (P) Ba2 CFR RATINGS TO CHINESE FUTURE; OUTLOOK STABLE

Hong Kong, November 18, 2005 -- Moody's Investor Service has assigned a provisional (P)Ba2 corporate family rating to Chinese Future Corporation. At the same time, Moody's has assigned a provisional (P)B1 foreign currency rating to Chinese Future's proposed 10-year USD220 million senior notes, which will be used to fund the acquisition of a portion of the concession rights to the Hangzhou Ring Road Expressway ("Ring Road") and pre-fund interest payments. The outlook on the ratings is stable. This is the first time that Moody's has assigned ratings to Chinese Future.

Chinese Future's corporate family rating of (P)Ba2 reflects the following key credit strengths of the Ring Road, the company's only planned operation: 1) its strategic location; 2) fully operational closed system toll road of relatively young age; 3) strong cash flow generation; and 4) good traffic and revenue growth prospect.

On the other hand, the rating is constrained by the following key credit challenges: 1) single asset risk; 2) limited availability of historical information; 3) lack of track record under Chinese Future's ownership; 4) regulatory and policy uncertainties in China; 5) transparency and corporate government standard untested; 6) high consolidated leverage and modest debt service coverage in earlier years.

The (P)B1 provisional debt rating reflects contractual and legal subordination of the noteholders to the senior bank debt lenders. There is a clear payment priority established contractually by a cash flow waterfall structure, and about 75% of total borrowings are secured. Despite the evolving nature of China's legal framework, Moody's believes that the noteholders are at risk of lower recovery levels, if a default occurs. The senior note is also structurally subordinated to the bank debt.

Moody's says that Chinese Future's corporate family rating is underpinned by the very strong operational profile of the Ring Road. Moody's notes the excellent location of the asset -- strategically positioned around the growing and wealthy city of Hangzhou and the Yangtze River Delta region to connect major cities and key national tourist spots. The rating agency expects continued double-digit traffic growth for the asset, supported by the region's higher-than-national-average GDP growth, expansion in car ownership, trade flows for domestic consumption and exports.

The Ring Road facility shows a balanced mix of passenger and commercial vehicle traffic, as well as a combination of intra-city, inter-city and through-traffic. It is an operational asset with relatively a young average age of 3 years. The facility, being a closed tolling system and a ring road, also commands advantages over open-tolled and point-to-point toll roads.

Nonetheless, Moody's notes the facility's lack of track record under Chinese Future's ownership and operation. Furthermore, only 8 months of operations were audited by Deloitte. The Hangzhou government has not made its payment since November 2004 under the present "Easy Pass" toll system, as the Ring Road is currently considered as part of the government and the government in anticipation of the transfer of concession rights decided to settle with Chinese Future, the buyer, directly upon closing. Moody's notes that such payment is to make up as much as 30% of the Ring Road's revenue, but draws comfort from the importance of this system to Hangzhou and therefore expects timely payment from the government going forward.

Moody's believes that Chinese Future's single asset risk makes it highly vulnerable to regulatory and policy uncertainties in China. The toll setting mechanism is not transparent, and there is no remedy should a competing toll road be built. Other than the planned bridges that will divert some traffic from part of the Ring Road upon their completion, Moody's shares management's assessment that the chance of a second ring road being built is low in the short to medium term.

As the Ring Road approaches saturation in the medium term, there is a possibility that the facility will need to be expanded. There is no specific provision for this in the current concession, although an option would be to negotiate with the government for an extension of the concession. This could have an adverse impact on the company's financial position, but Moody's believes it is too early to factor in any rating implication at this stage.

Chinese Future is a private company with private shareholders. Moody's notes that its lack of track record in terms of disclosure, transparency and corporate governance is a weakness compared to other rated entities globally. Nonetheless, the expected equity investment in the company by The Children's Investment Fund might bring such practices closer to international standards in the future.

Moody's acknowledges that the Ring Road has strong cash flow generation and good traffic growth prospects. The asset generated EBITDA of RMB552 million in the first eight months of 2005 and commanded a strong EBITDA margin of almost 90%. Nonetheless the financial profile is tempered by the highly geared capital structure, as reflected in an initial consolidated leverage of 87%.

Consolidated total debt/EBITDA is projected to be around 6-7x in 2006. The ladder-up repayment of the company's bank debt limits significant improvement in consolidated debt service coverage, which is expected to be about 2x in 2006. Although unconsolidated EBITDA interest coverage is lower at around 1-1.5x, this is mitigated by a cash reserve account that pre-funds annual interest payment.

The rating is likely to experience upward rating pressure if Chinese Futures establishes traffic numbers and demonstrates audited revenue and consolidated EBITDA that are in line with management's expectation in the first year of operations; lowers consolidated debt/EBITDA to below 5x; and/or improves transparency say through an IPO.

On the other hand, the rating could experience downward rating pressure if Chinese Futures materially under-achieves management's base case forecast; consolidated debt/EBITDA is still above 6x in 2007; unconsolidated EBITDA interest coverage falls below 1.3x; and/or the debt service coverage ratio at the PRC project level falls below 1.5x.

Chinese Future Corporation is a private company incorporated in October 2005 to be an investment holding company. Through its subsidiaries, it plans to acquire the concession rights to the Ring Road from the Hangzhou government. The Ring Road, completed at the end of 2003, is a 123km expressway that encircles Hangzhou, the capital city of Zhejing Province in China.

Hong Kong
Elizabeth Allen
Vice President - Senior Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

Hong Kong
Clara Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

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