Hong Kong, June 14, 2019 -- Moody's Investors Service has affirmed the A3 issuer rating of China Railway
Construction Corp Ltd (CRCC).
Moody's has also affirmed the following ratings:
(1) The A3 rating of the senior unsecured convertible bonds issued by
CRCC.
(2) The A3 rating of the senior unsecured perpetual bonds issued by CRCC
Yupeng Limited and guaranteed by CRCC.
(3) The A3 rating of the senior unsecured notes issued by CRCC Yuxiang
Limited and guaranteed by CRCC.
At the same time, Moody's has assigned a Baa1 rating to the
proposed subordinated perpetual securities to be issued by CRCC Chengan
Limited and guaranteed by CRCC.
The proceeds of the proposed issuance will be used to refinance existing
debt, for overseas investments and for general corporate purposes.
The outlook for all ratings is stable.
RATINGS RATIONALE
"The rating affirmation reflects our expectation that CRCC's credit quality
will remain broadly stable and within the parameters of its A3 rating
over the next one to two years, as higher debt levels will be largely
offset by increased earnings," says Chenyi Lu, a Moody's Vice
President and Senior Credit Officer.
Moody's expects CRCC's leverage -- as measured by debt/EBITDA
-- will remain around 4.5x-5.0x over the next
one to two year, similar to the 4.5x recorded at the end
of 2018. This stable financial profile will be driven by modestly
higher earnings and only a limited increase in debt, as CRCC will
keep its investments in real estate and build-operate-transfer
(BOT)/public-private partnership (PPP) projects at manageable levels.
This projected level of leverage is consistent with its A3 rating.
Moody's considers CRCC's proposed perpetual securities as 100%
debt-like securities due to the high 300 bps coupon step-up
at year five, which provides the company with a strong incentive
to prepay the bonds.
The Baa1 rating of the proposed perpetual securities is one notch lower
than CRCC's senior unsecured rating to reflect the subordinated
status of the notes. Moody's also assesses the likelihood of CRCC
deferring the coupon payment as low, given the company's strong
interest coverage ratio and the dividend stopper condition.
However, the rating on the subordinated perpetual securities could
be lowered if the company raises further debt with deferral features and
subordinated status, such that it becomes a substantial portion
of the capital structure, or if Moody's assesses that the company
is likely to defer a large number of coupon payments in advance of default.
CRCC's A3 rating incorporates its standalone credit strength and a three-notch
uplift to reflect Moody's expectation that the company will receive
a high level of support from the Government of China (A1 stable) through
its parent, China Railway Construction Co., Ltd.,
in times of stress.
CRCC's standalone credit strength reflects its strong market position,
solid operational capabilities, long operating track record,
and good financial and liquidity profile. The company is well positioned
to benefit from continued government investments in railways and other
infrastructure development.
The rating is constrained by the cyclical nature of the construction industry,
which is subject to evolving government policies and execution risks.
In addition, CRCC's business involves large working capital and
capital expenditure requirements, partly driven by its investments
in BOT/PPP projects as well as real estate development.
The stable outlook reflects Moody's expectation that the company will
maintain its strong execution and stable financial profile over the next
12-18 months, and that it will continue to receive the same
level of government support through its parent.
The rating could be upgraded if (1) Moody's believes there is an increased
likelihood of support from the government, when needed; and/or
(2) its standalone credit profile strengthens significantly.
CRCC's standalone credit profile could improve if it: (1) improves
its operating cash flow through disciplined working capital management;
(2) maintains a prudent investment strategy when investing in BOT/PPP
projects, and expands in real estate development and overseas markets;
(3) improves its profit margin and order backlog while growing its new
contract gains; and (4) lowers its debt leverage, such that
adjusted debt/EBITDA falls below 4.5x or adjusted EBITDA/interest
rises above 4.5x on a sustained basis.
On the other hand, CRCC's issuer rating could be downgraded if:
(1) Moody's believes that government support will weaken; and/or
(2) its standalone credit profile deteriorates.
Its standalone credit profile could deteriorate due to: (1) aggressive
investments in BOT/PPP projects and real estate development, resulting
in weakening operating cash flow; (2) a substantial decline in new
contracts, with its order backlog falling below 2x of revenue;
(3) large cost overruns and project delays; or (4) increasing debt
leverage, such that adjusted debt/EBITDA rises above 5.5x,
and adjusted EBITDA/interest falls below 3.0x on a sustained basis.
The principal methodology used in these ratings was Construction Industry
published in March 2017. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
China Railway Construction Corp Ltd is one of the largest integrated construction
companies in China. focusing on railway, highway, urban
rail transit and building construction. It also has sizeable operations
in other construction and non-construction businesses.
As of December 2018, the company was 51.13%-owned
by China Railway Construction Corporation, a central state-owned
enterprise. The parent company is wholly owned by the State Council
of China and supervised by the State-owned Assets Supervision and
Administration Commission.
The local market analyst for these ratings is Yuting Liu, +86
(106) 319-6530.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entities are participating and the rated entities or their agent(s)
generally provide Moody's with information for the purposes of its
ratings process. Please refer to www.moodys.com for
the Regulatory Disclosures for each credit rating action under the ratings
tab on the issuer/entity page and for details of Moody's Policy
for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Chenyi Lu
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
