Hong Kong, October 18, 2021 -- Moody's Investors Service has assigned a Ba1 corporate family rating
to Lanzhou Construction Investment (Holding) Group Co., Ltd.
(Lanzhou Construction) and withdrawn the company's Baa3 issuer rating.
Moody's has also downgraded to Ba1 from Baa3 the senior unsecured rating
on the bonds issued by City Development Company of Lan Zhou and guaranteed
by Lanzhou Construction.
At the same time, Moody's has changed the ratings outlook to negative
from rating under review.
This rating action concludes the review for downgrade initiated on 30
September 2021.
"The downgrade reflects the company's weakened funding access,
its large amount of debt coming due over the next 12 months, and
the tightened funding environment for issuers from fundamentally weak
regions, which we expect will continue for a period of time,"
says Ying Wang, a Moody's Vice President and Senior Analyst.
"We recognize the government's efforts and plans to support
the company's debt repayment, including facilitating coordination
with banks and other financial institutions for such purpose, which
will help alleviate the company's funding pressure and liquidity
risks in the next 3-6 months. However, such efforts
are unlikely to fully offset the negative impact of tightened regulatory
supervision over local government financing vehicles' (LGFVs) borrowing
and investors' aversion toward LGFVs in less developed regions.
As a result, Lanzhou Construction's funding access and liquidity
profile no longer support its investment-grade rating,"
adds Ying.
The negative outlook reflects the uncertainty around the company's
ability to strengthen its funding access in next 12-18 months.
RATINGS RATIONALE
Lanzhou Construction's access to funding has weakened since the
first half of 2021, following the implementation of stringent government
measures to curtail the contingent liabilities of local governments and
as investor risk aversion toward LGFVs from fundamentally weak regions
has increased.
At the same time, Lanzhou Construction faces sizable maturing debts,
including around RMB15 billion in onshore bonds that will come due over
the next 12 months.
Given its weakened funding access, Moody's expects that Lanzhou
Construction will need to rely on government support to meet its funding
needs.
Lanzhou Construction is the largest provider of essential public services
and the largest owner of key public infrastructure projects in Lanzhou
city. The company is also one of the largest state-owned
enterprises (SOEs) by asset size in Gansu province, with very large
amounts of outstanding bonds in the market.
As a result, Moody's believes the Lanzhou city government
and Gansu provincial government will mobilize funds and resources to support
Lanzhou Construction's liquidity needs. According to the company,
plans under discussion include land injections from the government,
the settlement of accounts receivables, asset disposal proceeds
and funding support from financial institutions.
While the government's coordinated efforts will help alleviate the
company's short-term funding pressure, Moody's
expects it will take time for Lanzhou Construction to resume access to
the capital market at a reasonable cost with long bond tenors to improve
its liquidity profile amid averse investor sentiment.
Moody's will also closely monitor the timeliness and effectiveness
of the coordination from the government to meet the company's funding
needs.
The company's Ba1 rating is based on the Lanzhou city government's
capacity to support (GCS) score of baa2; and Moody's assessment
of how the company's characteristics affect the Lanzhou city government's
propensity to support, which results in a two-notch downward
adjustment.
Moody's assessment of Lanzhou's GCS reflects Lanzhou city's status
as the capital of Gansu province, and Gansu province's relatively
weak economic and fiscal metrics, as well as high risks from its
SOE and local banking sectors compared with those of other provinces.
The Ba1 rating also reflects the Lanzhou city government's propensity
to support Lanzhou Construction because of its 100% ownership of
the company, Lanzhou Construction's status as the dominant
LGFV that provides essential public services in the city, and the
company's track record of receiving government cash payments.
However, the two-notch downward adjustment from the Lanzhou
government's GCS score reflects Lanzhou Construction's weak funding
access, large debt obligation arising from its public-policy
projects and the contingent risk arising from the external guarantees
it has provided to other companies.
Lanzhou 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 Lanzhou. Demographic
changes, public awareness and social priorities shape the company's
development targets and ultimately affect the Lanzhou city government's
propensity to support the company.
As for governance considerations, Lanzhou Construction is subject
to oversight by the Lanzhou city 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
Moody's could downgrade the rating if Lanzhou Construction fails to receive
sufficient support from the government to meet its funding needs or put
in place an appropriate refinancing plan for its maturing debts.
The rating could also be downgraded if the Lanzhou city government's propensity
to support weakens because of changes in Lanzhou Construction's characteristics,
such as (1) a decline in its position as the largest and dominant public
service provider in Lanzhou city; (2) material changes in its core
business with a substantial expansion of its commercial activities at
the cost of its public service functionalities, or substantial losses
by its commercial businesses; or (3) rapid increases in its debt
and leverage, with fewer corresponding government payments.
Given that Lanzhou Construction's rating is based on the Lanzhou city
government's GCS score, Moody's could downgrade the rating
if (1) China's sovereign rating is downgraded, or (2) the Lanzhou
city government's capacity to support weakens, which could arise
from a material worsening in Lanzhou's economic or financial profile or
its ability to coordinate timely support. Changes in the Chinese
government's policies that prohibit regional and local governments from
supporting LGFVs will also affect the rating.
An upgrade of the ratings is unlikely, given the negative outlook.
However, Moody's could revise the outlook to stable if Lanzhou Construction
strengthens its funding access and its liquidity profile with help from
the government.
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.
Established in 2016, Lanzhou Construction Investment Holding Group
Company Limited is 100% owned by Lanzhou State-owned Asset
Supervision and Administration Commission through a parent intermediary,
Lanzhou Investment (Holding) 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 these ratings is Cindy Yang, +86
(10) 6319-6570.
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Ying Wang
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