Hong Kong, July 30, 2020 -- Moody's Investors Service ("Moody's") has assigned a Ba1 Corporate
Family Rating (CFR) to Zhuji State-owned Assets Management Co.,
Ltd. (Zhuji SAMC) and has withdrawn the company's Baa3 issuer
rating, following the publication of its Local Government Financing
Vehicles (LGFVs) in China Methodology on 29 July 2020.
Moody's has also downgraded the senior unsecured rating on the bond
issued by Zhuji Development Limited and guaranteed by Zhuji SAMC to Ba1
from Baa3.
At the same time, Moody's has withdrawn the ba3 Baseline Credit
Assessment (BCA) previously assigned to Zhuji SAMC, reflecting the
change in primary methodology to LGFVs in China from Government-Related
Issuers Methodology.
The rating outlook has been changed to stable from negative.
The downgrade of Zhuji SAMC reflects (1) Moody's classification
of Zhuji SAMC as an LGFV under the new methodology, and (2) Moody's
assessment that Zhuji SAMC is more appropriately positioned at the Ba1
rating level, in view of Zhuji government's capacity to support
(GCS) score of baa3 and one notch downward adjustment relating to the
company's characteristics affecting its RLG owner's propensity to support.
The one notch adjustment considers the company's growing receivables
from other government-related entities and large commercial exposure
to commodity trading, which is counterbalanced by the company's
dominant role in providing essential public policy service in Zhuji city,
and its status as the largest state-owned enterprises in Zhuji
city in terms of asset size.
RATINGS RATIONALE
Zhuji SAMC's Ba1 ratings are based on (1) the Zhuji government's
GCS score of baa3, and (2) Moody's assessment of how the company's
characteristics affect the Zhuji government's propensity to support,
resulting in a one-notch downward adjustment.
The assessment considers Zhuji SAMC's strategic role as the largest
LGFV and dominant position in providing public services in Zhuji city,
as well as its ultimate 100% ownership by the Zhuji government.
Zhuji SAMC's considerable commercial activities and the associated
debts , notably in copper trading, lower the city government's
propensity to support when compared with LGFVs primarily tasked with public
policy objectives. Because it is generally more difficult for Chinese
RLGs to support debt associated with commercial activities than those
associated with public policy projects.
Moreover, the receivables due from other local government-related
entities including those owned by lower-tier township governments
have been rising since 2017. These receivables may not be easily
recovered and there is no clear mechanism if Zhuji SAMC will be adequately
compensated if these entities fail to repay.
The change in the primary methodology reflects the publication of Moody's
new LGFV in China Methodology and Moody's view that (1) RLG support is
the dominant credit consideration for an LGFV, and (2) LGFV-specific
characteristics may also affect RLGs' propensity to support LGFVs.
LGFVs are entities that are directly or indirectly fully owned and effectively
controlled by RLGs. They engage primarily in financing, investing
in and operating public infrastructure and social welfare projects on
behalf of their RLG owners.
Because the primary purpose of LGFVs is to serve public policy objectives
and provide public goods or services for free or at subsidized rates,
they are typically closely integrated with their RLG owners and RLGs typically
provide the majority of LGFVs' cash flow.
The analytical framework in this rating methodology comprises two components:
1) The "Governmental Capacity to Support" (GCS) component,
which considers aspects that could influence RLG owners' ability
to provide support to LGFVs in a timely manner; and
2) The "LGFV Characteristics Affecting Support" component,
primarily based on (1) an LGFV's business profile; (2) its
integration with the RLG as well as the control and oversight by the RLG;
(3) the risk that the LGFV will need to bailout other entities; and
(4) any exceptional governmental willingness to support characteristics,
and other analytical considerations. This analysis may result in
downward or, more rarely, upward adjustments in whole notch
increments to the GCS score.
The ratings also consider the following environmental, social and
governance (ESG) factors.
Environmental risks are low for Zhuji SAMC.
LGFVs generally have high social risks since they implement public policy
initiatives by building, owning and operating public infrastructure.
The company is exposed to a high degree of social risk since they implement
public policy initiatives by building, owning and operating public
infrastructure. Demographic changes, public awareness and
social priorities shape its development targets and ultimately affect
Zhuji city government's propensity to support it.
Governance considerations are also material to the ratings, as the
issuer is subject to oversight and reporting requirements to its owner
RLG, reflecting its public policy role and status as a government
owned entity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects (1) the stable outlook on the China's
A1 sovereign rating; (2) Moody's expectation that Zhuji city'
GCS will remain stable, and (3) the company's business profile
and integration with its RLG and the control and oversight provided by
the Zhuji government will remain largely unchanged over the next 12-18
months.
Moody's has recalibrated the rating tolerance levels of these rated LGFVs
to reflect the change in methodology and corresponding credit drivers.
Zhuji SAMC's ratings could be upgraded if (1) China's sovereign
rating is upgraded or Zhuji city's GCS strengthens, which
could be the result of a material strengthening in the city's economic
or financial profile, or its ability to coordinate timely support;
and (2) its characteristics change in a way that strengths Zhuji city's
propensity to support such as through:
- A material reduction in its credit exposure relating to receivables
due from other government related entities as well as risk and exposures
in commercial activities; or
- An increase in government payments and an improvement in the
predictability of government payment mechanisms, such as dedicated
fiscal budget allocations and transfers from higher-tier governments
whereby government payments can consistently cover a large share of their
operational and debt servicing needs.
On the other hand, its ratings could be downgraded if (1) China's
sovereign rating is downgraded or its respective city's GCS weakens,
which could be the result of a material weakening in the city's
economic or financial profile, or its ability to coordinate timely
support; (2) there are changes in the Chinese government's
policies that prohibit RLGs from providing financial support to LGFVs;
or (3) Its characteristics change in a way that weakens Zhuji city's
propensity to support, such as through:
- Material changes in its core business with substantial expansion
of commercial activities at the cost of its public service functionalities,
or substantial losses in its commercial activities;
- A decline in its position as the largest and dominant public
service provider in Zhuji city;
- Rapid increases in its debt and leverage, with less corresponding
government payments and this increases its reliance on high cost financing,
including debt borrowing from non-standard channels; or
- A material increase in receivables from government related entities
from current level
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.
Zhuji State-owned Assets Management Co., Ltd.
(Zhuji SAMC) is the largest LGFV in Zhuji city, and consolidates
most of the Zhuji government's major state-owned operational assets,
including urban infrastructure construction, affordable housing
development, water services, and public transportation.
At the end of 2019, Zhuji reported total assets of RMB128.2
billion.
The local market analyst for these ratings is Elaine Lai, +86
(212) 057-4018.
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
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same series, category/class of debt, security or pursuant
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provides certain regulatory disclosures in relation to the provisional
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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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.
Chenyi Lu
VP - Senior Credit Officer
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.)
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
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24/F One Pacific Place
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