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Rating Action:

Moody's assigns Baa1 to Beijing Enterprises Holdings' proposed Euro bond

 The document has been translated in other languages

15 Sep 2020

Hong Kong, September 15, 2020 -- Moody's Investors Service has assigned a Baa1 rating to the proposed senior unsecured notes to be issued by Talent Yield (Euro) Limited. The notes will be unconditionally and irrecoverably guaranteed by Beijing Enterprises Holdings Limited (BEHL, Baa1 stable).

The outlook is stable.

The proceeds from the senior unsecured notes will be used to refinance existing indebtedness.

RATINGS RATIONALE

"The senior unsecured notes — if they are issued as planned — will not have a material impact on BEHL's overall credit profile because the scale of the issuance will be manageable for BEHL," says Boris Kan, a Moody's Vice President and Senior Credit Officer.

BEHL's Baa1 issuer rating incorporates: (1) its standalone credit strength; and (2) a four-notch uplift, based on Moody's expectation of extraordinary support from the Beijing municipal government and the Government of China (A1 stable) through BEHL's ultimate parent, Beijing Enterprises Group Company Limited (BE Group), in times of need.

BEHL's standalone credit profile is supported by the company's diversified business portfolio and the stable cash flows from its monopoly and leading positions in the less-cyclical gas and water treatment businesses that back the group's rapid expansion, given the supportive government policies for the two sectors and rising environmental awareness in China.

On the other hand, BEHL's standalone credit profile is constrained by (1) the company's high leverage driven by acquisitions and investments, (2) its heightened business risks arising from its overseas investments, and (3) the uncertainty regarding the company's stake in PetroChina Beijing Pipeline Co., Ltd as part of the Chinese government's plan to reform the nation's gas pipeline network.

The support assessment reflects BEHL's (1) dominant role in the local natural gas and water utility sectors, which are commercially viable but are linked to the public policy goals of the Beijing municipal government and the central government; and (2) majority ownership by BE Group, which, in turn, is 100% owned by the Beijing municipal government.

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

The stable outlook primarily reflects Moody's expectation that BEHL will maintain its overall credit profile and will keep further expansions and acquisitions at a manageable scale over the next one to two years.

Moody's could upgrade BHEL's issuer rating if the company's standalone credit profile improves significantly. Indicators of improvement in BHEL's standalone credit profile include (1) successfully deleveraging by the company over time, or (2) favorable changes in the regulatory environment for its core gas and water segments.

The financial metrics for an upgrade of BHEL's standalone credit profile include (1) adjusted funds from operations (FFO)/interest coverage above 5x; (2) retained cash flow (RCF)/debt above 15%; or (3) adjusted debt/book capitalization below 45% for a sustained basis. All financial metrics are based on the pro-rata consolidation of Beijing Enterprises Water Group Limited, which was 41.1% owned by BEHL as of December 2019.

On the other hand, Moody's could downgrade BEHL's ratings if (1) the likelihood of support from the BE Group or the Beijing municipal government decreases, or (2) BEHL's standalone credit profile weakens significantly.

Downward pressure on BEHL's standalone credit profile could arise if (1) the company pursues further large debt-funded expansions or investments; (2) there are significant adverse changes to the regulatory regime that hurt the company's profitability and cash flow; or (3) dividend income from its 40% equity stake in PetroChina JV declines significantly following the reform of the nation's gas pipeline network.

Financial indicators that would point to a downgrade of BEHL's standalone credit profile include (1) adjusted FFO interest coverage below 2.5x, (2) RCF/debt below 8%, or (3) adjusted debt/book capitalization in excess of 60% over a prolonged period.

The rating also considers the following environmental, social and governance (ESG) factors.

BEHL's environmental risk is low. Natural gas distribution is the company's biggest earnings contributor and plays an important role in the government's air pollution control plan. Specifically, the Chinese government targets to increase natural gas consumption to 15% of its primary energy mix by 2030 from 5.9% in 2015.

BEHL faces moderate social risks in terms of worker health and safety in relation to its construction and operation of city gas projects and waste water treatment facilities. This risks are mitigated by the long track record of the company and the experience of the management.

BEHL's governance risk is moderate. While BEHL is owned and controlled by the Beijing Enterprises Group Company Limited (not rated) and ultimately the Beijing municipal government, its financial policy is characterized by policy-driven expansions, including overseas investments with higher volatilities than its core domestic city gas business.

The principal methodology used in this rating was Investment Holding Companies and Conglomerates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125855. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Beijing Enterprises Holdings Limited (BEHL) is 62.1% controlled by Beijing Enterprises Group Company Limited (BE Group), which in turn is 100% owned by the Beijing municipal government and supervised by the Beijing State-owned Assets Supervision and Administration Commission (SASAC).

BEHL is an investment holding company. The company operates in four business segments across China: (1) piped gas operations, (2) brewery operations, (3) equity investments in sewage and water treatment services, and (4) solid waste treatment operations. In the first half of 2020, the company reported HKD5.3 billion in profit before tax (excluding corporate expenses), of which 66% was from gas-related businesses, 6% from brewery operations, 17% from sewage and water treatment services, and 10% from solid waste treatment operations.

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.

Boris Kan
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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