Hong Kong, December 14, 2022 -- Moody's Investors Service has affirmed the Caa1 corporate family rating (CFR) of Lanzhou Construction Investment (Holding) Group Co., Ltd. (Lanzhou Construction).
The rating outlook remains negative.
"The affirmation reflects Lanzhou Construction's ongoing severe liquidity and refinancing risks, given the company's slow progress in addressing its large maturities over the next six months," says Ying Wang, a Moody's Vice President and Senior Analyst.
"We have lowered Lanzhou city government's capacity to support (GCS) score to ba1 from baa3 based on our expectation that the Gansu province and the city's economic fundamentals will remain weak in the near term. However, the lowering will not immediately affect Lanzhou Construction's Caa1 CFR because the CFR already reflects the tight regional funding environment as well as the uncertainty regarding the adequacy and timeliness of government support for the company," Wang adds.
The negative outlook reflects Lanzhou Construction's weak debt-repayment ability over the next 6-12 months.
RATINGS RATIONALE
The Caa1 rating primarily reflects the company's severe liquidity risk. Although the company managed to repay its public bonds through the support of Lanzhou and Gansu governments over the past 12 months, it has not yet restored its ability to refinance its debts on its own from the bond market or completed a financing with financial institutions to repay or refinance a substantial amount of debts coming due over the next six months.
Lanzhou Construction's CFR, which is multiple notches below Lanzhou's GCS, and negative outlook have already considered the company's weak sustainability of relying solely on government's co-ordination efforts to repay its debts over the next 12 -18 months. As such, the one notch lowering of Lanzhou's GCS does not have a material impact on the company's current rating.
The lowering of Lanzhou city's GCS mainly reflects Moody's expectation that the Gansu province and the city's economic fundamentals will remain weak in the near term due to China's sluggish land market. In the longer term, the province and city's economic growth will remain under pressure due to fundamental weaknesses including persistent population outflows and a less diversified economy. Weak growth will further strain Lanzhou's fiscal profile, which is characterized by a relatively low tax revenue-generating ability and high reliance on transfer payments. In addition, Lanzhou's land sales revenue has been volatile and will likely keep weak in the near term, creating challenges to its fiscal performance. Moreover, the sluggish economy will constrain Lanzhou's financial sector, which is already weak compared with other regions in China.
The funding environment in Gansu province and Lanzhou city has not recovered due to rising investor risk aversion. The region's relatively weak local financial sector with limited financial resources constrains the Lanzhou government's ability to coordinate with financial institutions to provide timely liquidity support to its local government financing vehicles (LGFVs), to a greater extent than Moody's previously estimated.
Lanzhou Construction's Caa1 CFR incorporates (1) the Lanzhou city government's GCS score of ba1; and (2) Moody's assessment of the company's liquidity risk and how its characteristics affect the Lanzhou city government's propensity to support, which results in a six-notch downward adjustment.
Moody's assessment of Lanzhou's GCS reflects (1) Lanzhou city's status as the capital of Gansu province, (2) the city's relatively weak economic and fiscal metrics, (3) the constraints faced by its local financial sector, and (4) limited disclosure by its local state-owned enterprises (SOEs), which hinders a complete assessment of the city's capacity to provide support.
The Caa1 rating primarily reflects the company's severe liquidity risk. It also reflects the Lanzhou city government's propensity to support Lanzhou Construction, based on its 100% ownership of the company and the company's status as the dominant LGFV providing essential public services in the city. This strength is counterbalanced by the company's weak debt management and the contingent risks arising from the external guarantees it has provided to other companies.
Lanzhou Construction's access to capital markets remains constrained and its negotiation with financial institutions to secure adequate refinancing has been slower than Moody's expected.
At the same time, Lanzhou Construction faces a large amount of bonds coming due or becoming puttable over the next six months. The company currently only relies on resources from the Lanzhou city government and Gansu provincial government to repay. However, there is execution risk associated with the timeliness and adequacy of government support.
In addition, Moody's believes Lanzhou Construction's ability to meet its other debt obligations will decline if the company is unable to negotiate refinancing terms with its creditors.
Lanzhou Construction's rating also considers the following environmental, social and governance (ESG) factors.
Lanzhou Construction has a neutral to low credit exposure to environmental risks, highly negative credit exposure to social risks, and very highly negative credit exposure to governance risks. The effect of these considerations on the rating cannot be fully mitigated by the expected support from the Lanzhou government, in times of need, to the company.
Lanzhou Construction's neutral to low environmental risk exposure is driven by the company's neutral to low exposure to physical climate risks in Lanzhou city, in terms of extreme weather patterns and their impact on its urban construction projects. The company's exposure to carbon transition, water management, waste and pollution and natural capital is also neutral to low.
Lanzhou Construction's highly negative social risk exposure is common among most LGFVs and relates to demographic and societal trends. The company invests in urban construction projects as it implements public policy initiatives mandated by the Lanzhou government. Population growth and demographic and societal trends shape the company's development targets and affect the Lanzhou city government's propensity to support the company.
Lanzhou Construction's very highly negative governance risk is driven by a very highly negative score on financial strategy and risk management due to the weak debt management and weak predictability of government payments, and highly negative score on management creditability and track record due to the management's lack of experience and expertise to deal with capital market volatility.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could downgrade the rating if Lanzhou Construction's liquidity deteriorates further, or if it fails to meet its debt obligations.
An upgrade of the ratings is unlikely, given the negative outlook. However, Moody's could revise the outlook to stable if Lanzhou Construction alleviates its high liquidity pressure and strengthens its funding access.
The principal methodology used in this rating was Local Government Financing Vehicles in China Methodology published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386644. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Established in 2016, Lanzhou Construction Investment (Holding) Group Co., Ltd. is 100% owned by the Lanzhou State-owned Asset Supervision and Administration Commission through a parent intermediary, Lanzhou Investment (Holdings) Group Co., Ltd. The company mainly engages in urban infrastructure construction, shantytown redevelopment, utilities, public services and transportation in Lanzhou city.
The local market analyst for this rating is Cindy Yang, +86 (10) 6319 6570.
REGULATORY DISCLOSURES
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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.
Ying Wang
Vice President - Senior Analyst
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
Ivan Chung
Associate Managing Director
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
