Hong Kong, November 19, 2021 -- Moody's Investors Service has assigned a Ba1 corporate family rating
(CFR) to Yinchuan Tonglian Capital Investment Operation Co.,
Ltd. (Yinchuan Tonglian) and withdrawn the company's Baa3 issuer
rating.
Moody's has also changed the rating outlook to stable from negative.
"The Ba1 CFR, which is lower than the previous Baa3 issuer rating,
reflects Yingchuan Tonglian's weakened funding access, as indicated
by the company's large net funding outflow in financing activities
and higher funding cost during January to September 2021. We expect
the tight funding environment for issuers from fundamentally weak regions
to continue," says Roy Zhang, a Moody's Vice President and
Senior Analyst.
The stable outlook reflects Moody's expectation that (1) the Yinchuan
government's ability to provide support will remain stable; and (2)
Yinchuan Tonglian will have adequate liquidity to address its funding
needs over the next 12 months with support from the Yinchuan government.
RATINGS RATIONALE
Yinchuan Tonglian's access to funding has weakened in 2021, following
the implementation of stringent government measures to curtail the contingent
liabilities of local governments and as investor risk aversion toward
local government financing vehicles (LGFVs) from fundamentally weak regions
has increased.
From January to September 2021, Yinchuan Tonglian recorded a net
funding outflow of RMB2.3 billion compared with a net funding inflow
of RMB1.2 billion - RMB3.0 billion in financing activities
over the past two years. The cost of the company's bond issuances
from the onshore bond market in the first half (H1) of 2021 was also higher
than the historical average. Moody's expects this trend to
continue over the next 6 to 12 months.
Given its weakened funding access, Yinchuan Tonglian needs to deploy
internal cash resources to repay matured debt, which significantly
reduced its cash balance to RMB643 million as of the end of September
2021, from RMB1,769 million as of the end of 2020.
As such, Yinchuan Tonglian's overall credit profile is more
in line with its Ba1 rated LGFV peers.
Yinchuan Tonglian's Ba1 rating is based on the Yinchuan government's capacity
to support (GCS) score of baa1; and Moody's assessment of how the
company's characteristics affect the Yinchuan government's propensity
to support, which results in a three-notch downward adjustment.
Moody's assessment of Yinchuan government's GCS reflects Yinchuan's
status as the capital of Ningxia Hui Autonomous Region, a moderate-risk
province in the western region of China (A1 stable), and the city's
weaker economic fundamentals, including a smaller economy and relative
geographic isolation, compared with the capital cities of more developed
regions.
The Ba1 rating also reflects the Yinchuan government's propensity to support
Yinchuan Tonglian because of its 100% ownership of the company;
Yinchuan Tonglian's status as the largest state-owned entity (SOE)
that provides essential public services in the city, including gas
supply and public transportation; and the company's track record
of receiving government cash payments.
However, the three-notch downward adjustment from the Yinchuan
government's GCS score reflects Yinchuan Tonglian's weak funding access;
medium exposure to commercial activities and contingent risk; evolving
corporate structure due to frequent asset reshuffles and business restructuring.
Yinchuan Tonglian'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 Yinchuan. Demographic
changes, public awareness and social priorities shape the company's
development targets and ultimately affect the Yinchuan government's propensity
to support the company.
As for governance considerations, Yinchuan Tonglian is subject to
oversight by the Yinchuan 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 upgrade the rating if (1) China's sovereign rating is upgraded
and Yinchuan government's GCS strengthens, which could arise from
a significant strengthening in Yinchuan city's economic or financial profile
or its ability to coordinate timely support; provided that the company's
characteristics will not change in a way that weakens the Yinchuan government's
propensity to support; or (2) Yinchuan Tonglian's characteristics
change in a way that strengthens the Yinchuan government's propensity
to support such as:
- It receives more government payments consistently, such
that dedicated fiscal budget allocations and transfers from higher-tier
governments can consistently cover a large share of its operational and
debt-servicing needs;
- It reduces the overall risk profile of its commercial businesses;
and
- It strengthens its funding access.
Moody's could downgrade the rating if (1) China's sovereign rating is
downgraded or Yinchuan government's GCS weakens, which could arise
from a significant weakening in Yinchuan city's economic or financial
profile or its ability to coordinate timely support; (2) changes
in Chinese government's policies prohibit regional and local governments
(RLGs) from providing financial support to LGFVs; or (3) the company's
characteristics change in a way that weakens the Yinchuan government's
propensity to support, such as:
- A weakening in its position as the largest and dominant public
service provider in Yinchuan city;
- Its core businesses undergo material changes, including
a substantial expansion into commercial activities that result in substantial
losses or at the cost of public services;
- Its debt and leverage rapidly increase without a corresponding
rise in government payments, leaving the company reliant on high-cost
financing, including through non-standard channels;
or
- It significantly increases loans, guarantees or other credit
exposures to external parties from current levels.
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.
Founded in 2008, Yinchuan Tonglian Capital Investment Operation
Co., Ltd. is 100% owned by the Yinchuan government.
The company is the largest SOE in Yinchuan city, and engages in
various businesses, including municipal infrastructure projects
construction, public transportation and gas supply in Yinchuan city.
The local market analyst for these ratings is Cindy Yang,+
(86)10-6319 6570 .
REGULATORY DISCLOSURES
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Roy Zhang
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Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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MD - Corporate Finance
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