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Rating Action:

Moody's assigns Ba1 CFR to Zhuji SAMC and withdraws Baa3 issuer rating following launch of new methodology

 The document has been translated in other languages

30 Jul 2020

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 (Zhuji SAMC) and has withdrawn the company's Baa3 issuer rating, following the publication of its Local Government Financing Vehicles (LGFVs) in China Methodology on 29 July 2020.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At the same time, Moody's has withdrawn the ba3 Baseline Credit Assessment (BCA) previously assigned to Zhuji SAMC, reflecting the change in primary methodology to LGFVs in China from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 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

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.

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.)
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

Releasing Office:
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

No Related Data.
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