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Rating Action:

Moody's assigns Baa1 rating to Shandong Hi-speed's proposed USD bond supported by keepwell agreement

 The document has been translated in other languages

11 Nov 2020

Hong Kong, November 11, 2020 -- Moody's Investors Service has assigned a Baa1 senior unsecured rating to Shandong Hi-speed Group Co., Ltd's (SDHG, A3 stable) proposed USD bond. The bond will be issued by Shandong Hi-Speed Group (Hong Kong) Co., Limited, a wholly-owned subsidiary of SDHG, and supported by a keepwell and liquidity support deed and a deed of equity interest purchase undertaking between SDHG, the issuer and the bond trustee.

SDHG plans to use the proceeds primarily to refinance its existing debt and for general corporate purposes.

The outlook on the rating is stable.

RATINGS RATIONALE

The Baa1 senior unsecured rating of the proposed bond reflects the combination of SDHG's A3 issuer rating and the structural features of the proposed bond.

The senior unsecured rating is one-notch below SDHG's issuer rating, as the keepwell agreement reflects SDHG's willingness to support the issuer. However, a keepwell agreement differs from an explicit guarantee in terms of the protection it provides and the way it is enforced.

Moody's expects that the proposed issuance will not materially increase SDHG's debt because of the small issuance size relative to SDHG's existing debt base, and Moody's expectation that the company will primarily apply the proceeds for refinancing.

SDHG's A3 issuer rating primarily combines its ba1 Baseline Credit Assessment (BCA) and a four-notch uplift based on Moody's assessment of a high likelihood of support from and a high level of dependence on the Shandong provincial government and, ultimately, the Government of China (A1 stable), when needed.

SDHG's ba1 BCA primarily reflects the company's status as the sole transportation infrastructure platform in Shandong province and the local government's proven track record of providing the company financial support. These strengths are balanced by (1) the commercial nature of the company's non-transportation businesses, which entail higher risks and have weaker credit profiles; (2) the company's high financial leverage and sizable capital spending pipeline, based on the government's transport infrastructure plans; and (3) the evolving regulatory regime, which affects the company's toll road business.

The support assessment reflects (1) SDHG's status as the Shandong government's dominant transportation infrastructure platform for investing in toll roads, railways and ports; (2) the Shandong's government 100% ultimate ownership of the company; (3) SDHG's status as a commercial public-sector entity under an upper-tier local government and the significant growth in its public-policy role as its rail segment grows; and (4) the Shandong government's track record of providing the company financial support .

The stable outlook reflects (1) the stable outlook on China's sovereign rating; and (2) the consideration that SDHG's BCA is appropriately positioned at the current level.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Moody's could upgrade the ratings if (1) the likelihood of support for SDHG increases; and/or (2) SDHG's standalone credit profile improves significantly.

Moody's would raise SDHG's BCA if the company improves its financial profile such that its adjusted funds from operations (FFO)/debt, excluding its financial segment and including government cash payments, exceeds 7% on a sustained basis.

A downgrade of the ratings could arise if the likelihood of government support for SDHG decreases, SDHG's standalone credit profile weakens significantly or its policy functions weaken significantly. Moody's could lower SDHG's BCA if the company takes on more aggressive debt-funded capital spending or is unable to control the risks associated with its non-railway and non-toll road businesses.

Credit metrics that could pressure the company's BCA include (1) its adjusted FFO/debt, excluding its financial segment and including government cash payments, remaining below 3%, primarily driven by its non-financial business segments; or (2) its adjusted FFO interest coverage, excluding its financial segment and including government cash payments, falling below 1x over a prolonged period.

The methodologies used in this rating were Publicly Managed Toll Roads and Parking Facilities published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091602, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Shandong Hi-speed Group Co., Ltd (SDHG) is the largest toll road operator in Shandong province, following its merger with Qilu Transportation Development Group Co., Ltd (QLTD) in September 2020. As of 11 November 2020, SDHG and QLTD own a combined toll road portfolio spanning 6,925 kilometers, of which 5,837 kilometers are within Shandong province, representing a market share of around 83.3% of expressways in the province. SDHG is also the Shandong government's sole platform for investing in the national railways in the province, in partnership with China State Railway Group (CSRG). As of the end of September 2020, the company operated local railways with a total length of 911 km.

In addition, SDHG engages in construction engineering, port and marine transportation, trading, logistics, financial and real estate businesses. As of the end of September 2020, it had a 47.16% shareholding in Weihai City Commercial Bank (WHCCB) and a 39.4% ownership in Taishan Property Insurance Company Limited, both of which entities SDHG was the largest shareholder.

As of the end of 2019, SDHG was 70%-owned by the Shandong State-owned Assets Supervision and Advisory Commission, 20%-owned by Shandong Guohui Investment Co., Ltd. (Baa2 stable) and 10% owned by the Shandong Provincial Council for Social Security Fund, which in turn is ultimately wholly owned by the Shandong Provincial Government.

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

This rating is 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 entity is participating and the rated entity or its agent(s) generally provides 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.

Ada Li
VP - Senior Credit Officer
Project & Infrastructure Finance
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

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 61 2 9270 8141
Client Service: 852 3551 3077

Yian Ning Loh
Associate Managing Director
Project & Infrastructure Finance
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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