Hong Kong, November 22, 2019 -- Moody's Investors Service has assigned a Baa3 rating to the proposed
subordinated perpetual securities to be issued by China State Construction
Finance (Cayman) III Limited, and unconditionally and irrevocably
guaranteed by China State Construction International Holdings Limited
(CSCI, Baa2 stable).
The proceeds from the subordinated perpetual securities will be used to
refinance CSCI's existing debt and for general corporate purposes.
The rating outlook is stable.
RATINGS RATIONALE
The Baa3 rating on the proposed subordinated perpetual securities reflects
the guarantee from CSCI, as well as the fact that the securities
are subordinated to the senior unsecured debt of CSCI, but rank
above CSCI's junior subordinated debt and common stock.
"CSCI's credit profile will not be materially impacted by
the subordinated perpetual securities issuance, because it will
mainly use the proceeds to refinance existing debt," says
Chenyi Lu, a Moody's Vice President and Senior Credit Officer,
and also Moody's International Lead Analyst for CSCI.
Moody's considers CSCI's proposed perpetual securities as
100% debt-like securities due to the high 300 bps coupon
step-up at year five, which provides the company with a strong
incentive to prepay the bonds.
The Baa3 rating for the proposed perpetual securities is one notch lower
than CSCI's senior unsecured rating to reflect the subordinated
status of the notes. Moody's also assesses the likelihood
of CSCI deferring the coupon payment as low, given the company's
strong interest coverage ratio and the dividend stopper condition.
However, the rating on the subordinated perpetual securities could
be lowered if Moody's assesses that the company is likely to defer
a large number of coupon payments in advance of default.
CSCI's Baa2 issuer rating incorporates its standalone credit strength
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 Limited (CSCECL,
A2 stable).
CSCI's standalone credit strength is supported by its (1) long 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.
CSCI also has a moderate exposure to Hong Kong, where the ongoing
protests could start affecting its performance if they further escalate
and continue. The company derived 36% and 15% of
revenue and gross profit, 37% of new order intake and 19%
of order backlog from Hong Kong in the first half of 2019.
Moody's expects CSCI's leverage—as measured by debt/EBTIDA
-- will trend down to around 4.8x-4.9x over
the next one to two years from 5.0x at the end of June 2019.
Moody's expects CSCI to achieve moderate EBITDA growth, underpinned
by its strong order backlog which could cover around 4.4x of its
annual revenue at the end of June 2019. Moody's also expects
debt growth to slow down as CSCI, under the directive of its parents,
is taking various measures to deleverage, including (1) curbing
capital-intensive investments; (2) strengthening cash collections
for existing projects; and (3) bidding for projects with shorter
turnaround times.
In terms of environmental, social and governance (ESG) considerations,
the rating takes into account the fact that CSCI is controlled,
supervised, and monitored by COHL, a 100% subsidiary
of CSCECL, which in turn is a backbone government-owned entity
under National State-owned Assets Supervision and Administration
Commission (SASAC). Being a listed company on the Hong Kong Stock
Exchange, the company provides good disclosure of its businesses
and financial performance. The company is led by experienced management
team in the construction industry and has a sound track record of project
execution. The company's tendency to debt-fund its
growth is counterbalanced by the government oversight and directive to
deleverage.
The stable outlook on the issuer rating reflects Moody's expectation
that over the next 12-18 months CSCI's standalone credit
profile will remain stable, that there will be no material change
in its importance towards COHL and China State Construction Engineering
Corporation (CSCEC), or in COHL's and CSCEC's ability
to provide support.
Moody's would upgrade CSCI's issuer rating if the company's
standalone credit profile improves without any material change 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 a
material deterioration in its business and financial profiles, or
if there are signs of weakening support from its parents, COHL and
CSCEC.
CSCI's standalone credit profile could come under pressure 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.
The principal methodology used in this rating was Construction Industry
published in March 2017. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
Listed on the Hong Kong Stock Exchange since July 2005, China State
Construction International Holdings Limited (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.
At the end of June 2019, CSCI was 64.66% owned by
China Overseas Holdings Limited (COHL), which is in turn controlled
by China State Construction Engineering Corporation Limited (CSCECL,
A2 stable) -- a listed company 56.3% owned by China
State Construction Engineering Corporation (CSCEC). CSCEC is 100%
owned by the National SASAC under the State Council of China.
The local market analyst for this rating is Sue Su, +86 (106)
319-6505.
REGULATORY DISCLOSURES
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
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issued on a support provider, this announcement provides certain
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for securities that derive their credit ratings from the support provider's
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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
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For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
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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.
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
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