Hong Kong, November 16, 2018 -- Moody's Investors Service has assigned a Baa2 senior unsecured rating
to the proposed senior perpetual securities to be issued by China State
Construction Finance (Cayman) I Limited, and unconditionally and
irrevocably guaranteed by China State Construction International Holdings
Limited (CSCI).
At same time, Moody's has affirmed CSCI's Baa2 issuer rating
and the Baa2 senior unsecured rating on the debt issued by China State
Construction Finance (Cayman) II Limited and guaranteed by CSCI.
The ratings' outlook is stable.
The proceeds from the guaranteed senior perpetual securities will be used
to refinance CSCI's existing indebtedness and for general corporate purposes.
RATINGS RATIONALE
The Baa2 rating on the proposed senior perpetual securities reflects the
guarantee from CSCI, as well as the fact that the securities will
rank pari passu with CSCI's other senior unsecured obligations.
"The proposed perpetual securities will help improve CSCI's liquidity
and debt maturity profile but not materially change its credit metrics,"
says Chenyi Lu, a Moody's Vice President and Senior Credit Officer,
and also Moody's International Lead Analyst for CSCI.
Moody's expects that CSCI's overall debt level will not increase materially,
because the issuance amount of the perpetual securities is small relative
to CSCI's total adjusted debt of HKD44 billion at 30 June 2018,
and because the proceeds will be mainly used to refinance existing debt.
Moody's considers the proposed senior perpetual securities as 100%
debt-like despite the presence of certain hybrid-like features,
such as the option of deferred coupons on a cumulative basis. This
is because the perpetual securities have a high step-up cost of
500 basis points (bps) after the first call date that creates an incentive
for the company to prepay the securities. Moody's also believes
it is unlikely that CSCI will defer the coupon, given the dividend
suspension clause.
The rating on the perpetual securities could be downgraded if Moody's
assesses that (1) the company is likely to defer a large number of coupon
payments in advance of default; or (2) debt with deferral features
becomes a substantial part of the company's capital structure.
CSCI's Baa2 issuer rating incorporates its standalone credit strength,
which is equivalent to the Ba1 rating level, and a two-notch
uplift to reflect Moody's expectation of strong parental support
from China Overseas Holdings Limited (COHL) in times of need. COHL
is a key subsidiary of the state-owned China State Construction
Engineering Corporation (CSCEC).
CSCI's standalone credit strength is supported by its (1) operating track
record and strong market position in the construction sector in Hong Kong
and Macau; (2) strong business visibility owing to its ample order
backlog; and (3) proven access to the onshore and offshore debt and
equity markets.
On the other hand, the company's credit profile is constrained by
(1) its small business scale and limited diversification; (2) the
increasing debt and operational risks associated with its investments
in infrastructure projects; and (3) its involvement in large-scale
projects, which entail execution risks, given the company's
small business scale.
The affirmation of CSCI's Baa2 issuer ratings reflects Moody's
expectation that CSCI's leverage -- as measured by
adjusted debt/EBITDA -- will trend down to 4.6x-4.9x
in the next 12-18 months from 5.0x at the end of June 2018,
when it peaked following a large investment in its infrastructure businesses.
Moody's expects CSCI to lower its leverage by narrowing the gap
between its investments and operating cashflow, because CSCI and
its parent are required to control their debt by curbing capital-intensive
investments as part of the SOE reform initiative in China. CSCI
has a guidance to keep its reported net gearing ratio at around 40%.
In addition, cash collections from its infrastructure investments
should also increase as most of the build and transfer (BT) projects it
has undertaken in the past two years have been completed and are now in
the pay-back period, which usually lasts for two to three
years. Moody's therefore expects they will provide CSCI with
cashflow of around RMB12-15 billion in 2019 and 2020.
Moody's expects CSCI's construction businesses in mainland
China, Macau and Hong Kong will continue to grow at a pace of 8%-9%,
allowing for EBITDA growth of around 9% during the same period.
The stable outlook on the issuer rating reflects Moody's expectation
that in the next 12-18 months CSCI's standalone credit profile
will remain broadly stable, that its importance within COHL and
CSCEC will not change materially and that COHL and CSCEC's ability to
support will remain intact.
Moody's would upgrade CSCI's issuer rating if the company's standalone
credit profile improves without any material changes in the support assessment.
The company's standalone credit profile could improve if the company (1)
strengthens its market position and broadens its business scale;
(2) maintains strong sales visibility by keeping a prudent investment
strategy; (3) continues its strong business execution without major
cost overruns or delays; and (4) improves its debt leverage.
Credit metrics indicative of upward rating pressure include adjusted debt/EBITDA
falling below 2.5x-3.0x and funds from operations
(FFO)/debt remaining above 20% on a sustained basis.
Moody's would downgrade CSCI's issuer rating if there is material
deterioration in its business and financial profiles, without any
material changes in Moody's support assessment.
CSCI's issuer rating would be downgraded if (1) the company faces significant
execution risks, such as cost overruns or project delays,
which negatively affect its profitability or cash collections; (2)
its order backlog falls below 1.0x of total annual sales;
and (3) its credit metrics weaken.
Credit metrics indicative of downward pressure include adjusted debt/EBITDA
remaining above 5.0x over the next 12 months, or funds from
operations/debt remaining below 10% for a prolonged period.
Moody's would also downgrade CSCI's issuer rating without a decline
in the company's standalone credit profile if there are signs of weakening
support from its parents, COHL and CSCEC.
The principal methodology used in these ratings was Construction Industry
published in March 2017. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
CSCI started its operations in Hong Kong in 1979 and is now one of the
largest construction contractors in Hong Kong and Macau. The company
expanded its operations into mainland China in 2007. Its business
in the mainland consists of affordable housing and infrastructure projects.
It was listed on the Hong Kong Stock Exchange in July 2005.
At the end of 2017, CSCI was 64.6% owned by COHL,
which is in turn controlled by China State Construction Engineering Corporation
Limited (CSCECL, A2 stable) - a listed company 56.3%
owned by CSCEC. CSCEC is 100% owned by the State-owned
Assets Supervision and Administration Commission under the State Council
of China.
The local market analyst for these ratings is Karen Guo, +86
(212) 057-4018.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
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.
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
