Hong Kong, December 28, 2020 -- Moody's Investors Service has changed to negative from stable the outlook
on the Ba1 corporate family rating (CFR) of Kunming Municipal Urban Construction
Investment & Development Co., Ltd. (Kunming Construction),
as well as the Ba1 senior unsecured rating on the bonds issued by Kunming
Construction.
At the same time, Moody's has affirmed the above ratings.
"The negative outlook reflects the company's weaker-than-expected
funding access, which hinders its efforts to replace its high-cost
debts borrowed from non-standard financing with bonds and bank
loans. As a result, we expect that Kunming Construction's
reliance on non-standard financing will remain high in the next
12 months and accordingly undermine its ability to improve its debt structure,
which is weak compared with its rated peers," says Ying Wang,
a Moody's Vice President and Senior Analyst.
RATINGS RATIONALE
Moody's estimates that at the end of 2020, over half of Kunming
Construction's total debt would be borrowed from non-standard
financing channels, mainly trust loans and wealth management debt
products. The company had planned to expand its onshore bond financing
and bank credit facilities, lower its reliance on non-standard
funding sources and improve its debt structure, but investors aversion
toward the fundamentally weak region, driven by the recent spate
of onshore bond defaults by state-owned enterprises (SOEs),
will likely hamper these efforts. As such, it is unlikely
that the company's debts from non-standard financing channels
will fall materially from the current high level by the end of 2021.
Kunming Construction's debt structure and weaker-than-expected
access to funding amid government payment uncertainties due to volatile
land sales in Kunming will negatively impact the Kunming government's
propensity to support, and consequently bring about downward pressure
on the company's rating.
The company's Ba1 rating is based on (1) the Kunming government's
GCS score of baa2; and (2) Moody's assessment of how the company's
characteristics affect the Kunming government's propensity to support,
resulting in a two-notch downward adjustment.
Moody's assessment of Kunming's GCS reflects (1) Kunming's
status as the provincial capital of Yunnan province, (2) the province's
level of development and large funding gap relative to peers, and
its reliance, to a greater extent, on payment transfers from
the central government; and (3) Kunming's fiscal and financial
profile, which is characterized by small operating deficits and
a large direct debt burden relative to other provincial capitals.
The Ba1 rating reflects the Kunming government's propensity to support
Kunming Construction, given (1) the Kunming government's100%
ownership of the company; (2) Kunming Construction's public-policy
role in undertaking primary land development and infrastructure construction
in Kunming; and (3) the company's track record of receiving
government payments.
The rating also considers the company's weak access to funding and
high exposure to non-standard financing channels, which constrain
its debt management ability, as well as its exposure to contingent
risks arising from external guarantees provided to other SOEs, which
give rise to a two-notch downward adjustment from the Kunming's
GCS.
Kunming Construction's rating also considers the following environmental,
social and governance (ESG) factors.
The company bears high social risks as it implements public-policy
initiatives by building public infrastructure in Kunming. Demographic
changes, public awareness and social priorities shape the company's
development targets and ultimately affect the Kunming government's propensity
to support the company.
As for governance considerations, Kunming Construction is subject
to oversight by the Kunming government and has to meet several reporting
requirements, reflecting its public-policy role and status
as a government-owned entity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, an upgrade of the ratings is unlikely
in the near future. However, Moody's could change the
outlook back to stable if
- the company strengthens its access to funding and improves its
debt maturity profile; and
- a significant increase in government payments which enables it
to reduce its reliance on non-standard financing channels,
such that its debts from these channels account for less than 40%
of its total debt.
Moody's could downgrade the rating if (1) China's sovereign
rating is downgraded or Kunming GCS weakens, which could arise from
a material weakening in Kunming's economic or financial profile
or the government's ability to coordinate timely support; (2)
changes in Chinese government policies prohibit RLGs from providing financial
support to LGFVs; or (3) Kunming Construction's characteristics
change in a way that weakens Kunming government's propensity to
support such as:
-- Its core businesses undergo material changes, including
substantial expansions into commercial activities at the cost of public
services, and/or substantial losses in commercial activities;
-- Its loans and guarantees to external parties materially increase
from the current level;
-- It continues to have a high reliance on non-standard financing,
such that such debts account for over 40% of its total debt;
or
-- Its debt and leverage grow rapidly, while it receives less
corresponding government payments.
The principal methodology used in these ratings was Local Government Financing
Vehicles in China Methodology published in July 2020 and available at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216254.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Kunming Municipal Urban Construction Investment & Development Co.,
Ltd. is 100% ultimately owned by the Kunming municipal government
through an 84.42% direct ownership and a 15.58%
ownership via Kunming Development Investment Group, which is wholly
owned by the Kunming government. Kunming Construction is mainly
engaged in primary land development and city infrastructure construction
in Kunming, especially in the Wujiaba area. Its other operations
include the construction and maintenance of underground utility tunnels
for power, water, gas and telecommunications in the city.
Kunming Construction is a major LGFV by asset size in Kunming.
As of 2019, it reported a total revenue of RMB5.2 billion
and total assets of RMB66.9 billion, which amounted to 7.9%
of state-owned assets under Kunming SASAC.
The local market analyst for these ratings is Elaine Lai, +86
(212) 057-4018.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The first name below is the lead rating analyst for this Credit Rating
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Ying Wang
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
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