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Rating Action:

Moody's assigns Ba1 CFR to Lanzhou Construction and withdraws Baa3 issuer rating; changes outlook to negative

 The document has been translated in other languages

18 Oct 2021

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 (Lanzhou Construction) and withdrawn the company's Baa3 issuer rating.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.

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.

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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

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

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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