Hong Kong, June 08, 2022 -- Moody's Investors Service has assigned a senior unsecured rating of A3 to the proposed note drawdown to be issued by Coastal Emerald Limited (Coastal Emerald) under the company's medium-term note (MTN) program. The unsecured and unsubordinated note is unconditionally and irrevocably guaranteed by Shandong Hi-speed Group Co., Ltd (SDHG, A3 stable).
Coastal Emerald Limited is an indirectly wholly owned subsidiary of China Shandong Hi-speed Financial Group Ltd (SHFG), which is 43.42% owned by SDHG.
SDHG and SHFG plan to use the net proceeds raised through Coastal Emerald for the financing and/or refinancing, in whole or in part, green projects.
RATINGS RATIONALE
The A3 note rating reflects the unconditional and irrevocable guarantee from SDHG, which represents an unsecured, unsubordinated obligation of SDHG. Therefore, the senior unsecured bond rating is the same as the A3 issuer rating of SDHG.
Moody's expects that the proposed issuance will not materially increase SDHG's debt because of the small issuance size relative to SDHG's existing debt base, and the agency's expectation that the company will primarily apply the proceeds for refinancing.
SDHG's A3 issuer rating incorporates its ba1 Baseline Credit Assessment (BCA), and Moody's assessment of a high likelihood of support from, and SDHG's high level of dependence on, the Shandong provincial government and, ultimately, the Government of China (A1 stable) if necessary, which results in a four-notch uplift to its rating.
SDHG's ba1 BCA reflects the company's status as the transportation infrastructure platform of Shandong province and its proven track record of receiving financial support from the local government. These strengths are balanced against the increasingly commercial nature of the company's non-transportation businesses, which entail higher risks and have weaker credit profiles; its high leverage and sizable capital spending pipeline, based on the government's transportation investment plans; and the evolving regulatory regime for the company's core toll road business.
The support assessment reflects SDHG's status as the Shandong provincial government's dominant transportation infrastructure platform for operating toll roads, and investing in railways and ports. The company is a commercial public-sector entity controlled by an upper-tier local government and has a track record of receiving various forms of support from the Shandong provincial government.
In terms of environmental, social and governance (ESG) considerations, SDHG faces limited environmental risks. Tightening emission controls and reducing car traffic will hurt toll road traffic volume, but the impact will be offset by the increasing use of electric vehicles and technological advancements. SDHG's social risks are moderate, mainly arising from the absence of an effective toll fare framework to recover costs, policy-led expansion, and public expectations on the efficiency and stability of public transportation infrastructure operations. SDHG's financial policies are heavily directed by the government under its full government ownership and status as a key transportation platform of Shandong. However, governance risks will emerge if SDHG further engages in commercial activities outside its normal policy mandate, and such a misalignment will lead to a weakening of the government's willingness to support SDHG when financing needs are caused by commercial activities.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
If SDHG's rating is upgraded, the guaranteed note rating would also be upgraded.
Moody's could upgrade the rating if the likelihood of SDHG receiving government support increases or SDHG's standalone credit profile improves significantly, or both. SDHG's BCA could be raised if the company improves its financial profile such that its Moody's adjusted funds from operations (FFO)/debt, excluding its financial segment and including its government cash payments, exceeds 9% on a sustained basis.
If SDHG's rating is downgraded, the guaranteed note rating would also be downgraded.
The rating could be downgraded if the likelihood of SDHG receiving government support decreases, or the company's standalone credit profile or policy functions weaken significantly.
SDHG's BCA will be lowered if the company undertakes more aggressive debt-funded capital spending or is unable to control the risks associated with its non-transportation businesses. Credit metrics that could lead to downward pressure on the company's BCA include SDHG's adjusted FFO/debt, excluding its financial segment and including its government cash payments, remaining below 4%, primarily driven by its nonfinancial business segments; or its adjusted FFO interest coverage, excluding its financial segment and including its government cash payments, remaining below 1x on a sustained basis.
The methodologies used in this rating were Publicly Managed Toll Roads and Parking Facilities published in March 2019 and available at https://ratings.moodys.com/api/rmc-documents/60219, and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
Shandong Hi-speed Group Co., Ltd (SDHG) is the largest toll road operator in Shandong province. As of 31 December 2021, SDHG owned a toll road portfolio spanning 7,779 kilometers (km), of which more than 80% of its operating mileage is within Shandong province.
SDHG is also the Shandong government's sole platform for investing in the province's national railways, in partnership with China State Railway Group Co., Ltd. (CSRG). In addition, SDHG engages in construction engineering, port and marine transportation, trading, logistics and financial businesses. As of 31 December 2021, it had a 48.67% shareholding in Weihai City Commercial Bank (WHCCB) and a 39.41% ownership in Taishan Property & Casualty Insurance Company Limited; it is the largest shareholder of both the entities.
As of 31 December 2021, SDHG was 70% owned by the Shandong State-owned Assets Supervision and Advisory Commission (SASAC), 20% by Shandong Guohui Investment Co., Ltd. (Baa2 stable) and 10% by the Shandong Provincial Council for Social Security Fund, which, in turn, is ultimately wholly owned by the Shandong provincial government.
Coastal Emerald Limited (Coastal Emerald) is indirectly wholly owned by China Shandong Hi-speed Financial Group Ltd (SHFG), which was 43.42% owned by Shandong Hi-speed Group Co., Ltd (SDHG, A3 stable) as of the end of 2021. SDHG is ultimately 100% owned by the Shandong provincial government.
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 on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
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Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
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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.
Ada Li
VP - Senior Credit Officer
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
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Yian Ning Loh
Associate Managing Director
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
