Hong Kong, April 06, 2022 -- Moody's Investors Service has assigned a Ba1 senior unsecured rating to the proposed USD bonds to be issued by Yangzhou Economic and Technological Development Zone Development Corporation (YETDC; Ba1 stable).
The rating outlook is stable.
The company plans to use the proceeds to refinance existing indebtedness in accordance with the green finance framework and the NDRC certificate.
RATINGS RATIONALE
YETDC's Ba1 corporate family rating is based on the Yangzhou government's capacity to support (GCS) score of baa2, and Moody's assessment of how YETDC's characteristics affect the Yangzhou government's propensity to provide support, resulting in a two-notch downward adjustment from the GCS score.
Moody's assessment of Yangzhou's GCS score reflects Yangzhou's status as a prefectural-level government and its position at a relatively lower administrative level in Moody's assessment of the hierarchy of regional and local governments (RLGs) in China (A1 stable); and Yangzhou's high state-owned enterprise (SOE) liabilities relative to its fiscal revenue, which present contingent liability risks.
YETDC's CFR reflects the Yangzhou government's propensity to provide support to YETDC, which is based on the Yangzhou government's full ownership of YETDC; the company's status as a major local government financing vehicle (LGFV) by asset size in Yangzhou and its position as the sole provider of essential public services in the Yangzhou Economic and Technological Development Zone (the Development Zone), including shantytown redevelopment, social housing construction, and primary land and infrastructure development.
However, the two-notch downward adjustment from Yangzhou's GCS score reflects the company's fast debt growth relative to local economic growth, the lack of a highly predictable government payment mechanisms, and the high contingent risk associated with the external guarantees and third-party lending it has provided to other SOEs.
The Development Zone, a national-level economic and technological development zone, plays an important role in the upgrading of Yangzhou's industries and is a key driver of the city's economic development.
Moody's estimates that YETDC received government cash payments totaling around RMB 21.2 billion in 2017-20, mainly in the form of compensation for primary land development and infrastructure projects, capital injections and subsidies. The payments related to primary land development are inherently subject to public land sales volatility.
The company has a high level of external guarantees and third-party lending relative to its total equity. However, it has shown improvement in the past 18 months – its external guarantee and third-party lending to total equity ratio declined to 66% at the end of 2020 and to 59% as of June 2021, from 112% at the end of 2019.
The rating also considers the following environmental, social and governance (ESG) factors.
YETDC bears high social risk as it implements public-policy initiatives by developing public infrastructure in the Development Zone. Demographic changes, public awareness and social priorities shape its development targets and ultimately affect the Yangzhou government's propensity to support the company.
Governance considerations are also material to the ratings, as YETDC is subject to oversight by the Yangzhou government and has to meet reporting requirements, reflecting the company's public-policy role and status as a government-owned entity.
Environmental risks are low for YETDC.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
YETDC's stable outlook reflects (1) the stable outlook on China's sovereign rating; and (2) Moody's expectation that the Yangzhou government's capacity to provide support will remain stable; and (3) Moody's view that the company's business profile and integration with the Yangzhou government, and the Yangzhou government's control and oversight of the company, will remain largely unchanged over the next 12-18 months.
Moody's could upgrade the ratings if (1) China's sovereign rating is upgraded; or the Yangzhou government's capacity to support strengthens, which could arise from a material improvement in Yangzhou's economic or financial profile, or the government's ability to coordinate timely support, or (2) YETDC's characteristics change in a way that increases the Yangzhou government's propensity to support, such as
- YETDC becoming strategically more important to the Yangzhou government;
- an increase in government payments and an improvement in the predictability of government payment mechanisms, whereby dedicated fiscal budget allocations and transfers from higher-tier governments can consistently cover a large share of the company's operational and debt servicing needs;
- an improvement in access to bank loans and the public bond market, as reflected by the company having lower funding costs than its rated peers; and
- a material reduction in loans, guarantees or other credit exposures to external parties relative to its equity base.
Moody's could downgrade the ratings if (1) China's sovereign rating is downgraded; or the Yangzhou government's capacity to support weakens, which could arise from a material weakening in the Yangzhou's economic or financial profile, or the government's ability to coordinate timely support, (2) changes in Chinese government policies prohibit RLGs from providing financial support to LGFVs, or (3) YETDC's characteristics change in a way that weakens the Yangzhou government's propensity to support, such as
- 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 in commercial activities;
- its debt and leverage continue to grow rapidly and it receives fewer corresponding government payments, which increase its reliance on high-cost financing, including borrowing from non-standard channels; or
- a material increase in loans, guarantees or other credit exposures to external parties from the current level, or a significant loss resulting from these credit exposures.
The principal methodology used in this rating 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.
Yangzhou Economic and Technological Development Zone Development Corporation (YETDC) was established in 1992 and is 100% owned by the Yangzhou government. The company is the sole provider of public services in the Yangzhou Economic and Technological Development Zone, including shantytown redevelopment, social housing construction, and primary land and infrastructure development. As of September 2021, YETDC reported a revenue of RMB1.2 billion and total assets of RMB66.5 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.
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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_1288235.
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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.
Ying Wang
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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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:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
