Hong Kong, May 21, 2019 -- Moody's Investors Service has affirmed the Baa3 issuer rating of
Yiwu State-owned Capital Operation Co., Ltd.
(YSCO) and senior unsecured rating of Chouzhou International Investment
Limited. The outlooks are stable.
At the same time, Moody's has assigned a Baa3 senior unsecured
rating to the proposed USD notes to be issued by Chouzhou International
Investment Limited and guaranteed by YSCO.
The proceeds will be used to invest in key infrastructure construction
projects and for general corporate purposes.
RATINGS RATIONALE
The Baa3 rating on the proposed notes reflects the irrevocable and unconditional
guarantee provided by YSCO.
YSCO's Baa3 issuer rating primarily combines: (1) its ba3 baseline
credit assessment (BCA); and (2) Moody's assessment of a strong
likelihood of support from and a high level of dependence on the Government
of China (A1 stable) in times of need, resulting in a three-notch
uplift from its BCA.
Moody's support assessment reflects: (1) the company's
100% ownership by the Yiwu government; (2) its status as the
core platform of the Yiwu government to manage and operate approximately
90% the city's state-owned assets, including
the small commodity trading centers which is of strategic importance to
China's One Belt One Road initiative; (3) its undertaking of
shanty town projects, affordable housing and public infrastructure
projects for the government; (4) its monopoly position in urban utility
services, such as transportation and water services; (5) the
strong track record of government support in the form of large and recurring
cash grants.
The support assessment also considers the reputational and contagion risks
that may arise if YSCO were to default, given the large amount of
onshore bonds it has outstanding.
As such, Moody's believe the central government will support
efforts by the Zhejiang provincial government and Yiwu government to prevent
YSCO from defaulting and thus avoid disruption to the domestic financial
market. This support can take various forms, including government
subsidies, capital or asset injections, as well as loans from
policy and state-owned banks.
The high dependence level reflects the fact that YSCO and the central
government are exposed to common political and economic event risks.
YSCO's BCA of ba3 is driven by: (1) the large and recurring
cash grants it receives from the Yiwu government; (2) the stable
recurring rental income from its internationally recognized small commodity
trading centers; (3) its sound access to domestic funding.
In 2018, YSCO received around RMB11 billion in cash grants from
the Yiwu government, in the form of buybacks of infrastructure projects,
government funds allocation, operating subsidies and capital injections.
The amount was up 68% from the approximate RMB6.5 billion
received in 2017, supported by the local government's increased
fiscal income and fund revenue.
YSCO's small commodity trading centers reported stable operations
in 2018, registering around RMB1.4 billion of recurring net
rental income, which covered around 38% of YSCO's cash
interest expense in 2018.
On the other hand, YSCO's BCA is constrained by (1) its sizable
investment requirements for infrastructure construction and affordable
housing projects over the next 12-18 months; (2) its small
and volatile commercial property development businesses.
YSCO spent around RMB19 billion in capital expenditure and investments
in 2018, similar to the level spent in 2017. This high level
of capital expenditure and investments resulted in an increase in debt,
despite the sizeable cash grants received from the government during the
year.
Specifically, YSCO's debt increased to around RMB90 billion
at the end of 2018 from around RMB75 billion at the end of 2017,
pushing its interest expenses up to RMB3.6 billion in 2018 from
RMB2.7 billion in 2017.
Moody's expects YSCO's capital expenditure and investments
will stay around RMB20 billion in 2019, further raising its debt
to around RMB100 billion by the end of 2019. Consequently,
Moody's expects adjusted FFO interest coverage (including government
grants) to weaken to 3.3x from around 3.6x in 2018.
Nevertheless, these weaker metrics will still support its ba3 BCA.
YSCO had around RMB10.4 billion in cash at the end of 2018,
which could only cover around 36% of its RMB29 billion debt maturing
in 2019. Moody's expects YSCO will be able to refinance most
of its short-term debt due to its status as the sole state-owned
asset management platform in Yiwu. Its good access to domestic
funding is also indicated by its relatively low funding costs and low
exposure to non-standard funding channels.
The stable outlook reflects: (1) the stable outlook on China's sovereign
rating; (2) Moody's expectation that YSCO's important role
to the local government will remain intact; and (3) the consideration
that YSCO's BCA is appropriately positioned at the current level.
Moody's would upgrade YSCO's ratings if (1) the likelihood
of central government support increases; and (2) YSCO's BCA
improves significantly.
Moody's could raise YSCO's BCA if the company's credit profile improves,
as indicated by a reduced funding gap between cash flows from the government
and its investment needs, or by stronger recurring cash flow from
its non-government related businesses.
Credit metrics indicative of upward pressure on its BCA include:
(1) a material reduction in its adjusted debt; (2) adjusted debt/book
capitalization falling below 60% on a sustained basis; (3)
recurring net rental income/interest coverage rising above 1.0x
.
Moody's would downgrade the ratings if (1) the likelihood of central
government support for YSCO decreases; or (2) YSCO's BCA weakens.
YSCO's BCA could be lowered in case of a material deterioration in its
business or financial profile, such as a larger-than-expected
funding gap between cash flows from the government and its investment
needs as a result of reduced support from the government, an increased
exposure to risky commercial businesses, or weakened access to funding.
Credit metrics indicative of downward pressure on its BCA include:
(1) much larger-than-expected debt increase; (2) adjusted
debt/book capitalization exceeding 75% on a sustained basis;
(3) recurring net rental income/interest coverage falling below 0.2x.
The methodologies used in these ratings were Business and Consumer Service
Industry published in October 2016, and Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Yiwu State-owned Capital Operation Co., Ltd.
(YSCO) is 100%-owned and directly supervised by the State-Owned
Assets Supervision and Administration Commission (SASAC) of the Yiwu City
Government.
As the sole operator and the investment and financing platform for state-owned
assets in Yiwu, the company consolidates the city's major state-owned
operational assets, including its small commodity trading centers,
urban infrastructure construction, the development of shantytown
renovation projects, warehousing and logistics, water services,
and public transportation.
Its assets totaled RMB155 billion at 31 December 2018.
The local market analyst for these ratings is Janet Lu, +86
(21) 2057-4029.
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
