Hong Kong, September 10, 2019 -- Moody's Investors Service has assigned a Baa3 senior unsecured rating
to the proposed USD backed senior unsecured bonds to be issued by Shuifa
International Holdings (BVI) Co., Ltd, a wholly owned
subsidiary of Shuifa Group Co., Ltd. (Shuifa,
Baa3 stable).
The bonds will be unconditionally and irrevocably guaranteed by Shuifa.
The ratings outlook is stable.
The net proceeds will be used for project construction and refinancing
of Shuifa's existing indebtedness in China (A1 stable).
RATINGS RATIONALE
"The proposed issuance will not materially affect its credit metrics,
as the scale of the issuance is manageable for Shuifa, and part
of the proceeds will be used to refinance existing debt," says Ada
Li, a Moody's Vice President and Senior Credit Officer.
"Shuifa's Baa3 rating reflects its close alignment with the Shandong
provincial government and its high strategic importance to the regional
water supply," adds Li.
The Baa3 senior unsecured rating assigned to the proposed bonds is consistent
with Shuifa's Baa3 issuer rating, reflecting the unconditional and
irrevocable guarantee that will be provided by Shuifa.
Shuifa's Baa3 issuer rating combines (1) its b1 baseline credit assessment
(BCA) and (2) 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) in times of need.
Shuifa's BCA reflects its strong market position in water supply within
the province, and the recurring financial support it receives from
the Shandong provincial government. However, its BCA is constrained
by its weak financial metrics, and by the elevated risks associated
with its non-water utilities operations.
Moody's assessment of a high likelihood of support is based on the company's
(1) strategic importance as a commercial public sector enterprise,
reflecting the company's policy role as the province's sole platform for
water supply and utilities services; and (2) full ultimate ownership
by the Shandong provincial government, which exercises direct supervision
and control. The "high" dependence level reflects that Shuifa and
the central government are exposed to common political and economic event
risks.
Moody's expects Shuifa to maintain high financial leverage, with
funds from operations (FFO) to interest coverage and FFO/net debt --
after considering recurring government payments, subsidies and its
acquisition of China Singyes Solar Technologies Holdings Limited --
around 1.5x-1.7x and 2%-4% respectively
over the next three years.
Moody's expects the company's capital expenditure program to be
around RMB7-RMB9 billion during 2020-2022.
With Shuifa's key Yellow River diversion project scheduled for completion
in 2019, the company may increase its investment in non-water
supply and utilities businesses, or businesses outside Shandong
province. Such investments will increase Shuifa's business risk
and financial volatility. At the same time, these investments
are less likely to receive ongoing financial support from the provincial
and central governments. These risks are somewhat mitigated by
Moody's expectation that the water-related business will remain
Shuifa's predominant focus by a large degree, providing support
for its BCA and rating.
In addition, the company is exposed to evolving policies around
water utilities, clean energy and government support for local state-owned
enterprises.
The stable outlook reflects (1) the stable outlook on China's sovereign
rating; and (2) Moody's expectation that Shuifa's BCA will remain
appropriately positioned at b1. The stable outlook also considers
Moody's expectation that Shuifa's strategic importance to the government
will not change materially, despite the evolving policy environment
and Shuifa's diversification into non-water utilities operations.
The ratings could be upgraded if (1) the likelihood of government support
for Shuifa increases; or (2) Shuifa's standalone credit profile improves
significantly.
Its BCA could improve over time if (1) there are material positive improvements
in the regulatory environment for water utilities and local state-owned
enterprises; (2) Shuifa adopts a less aggressive expansionary strategy;
or (3) it achieves sustained improvements in its financial profile.
Financial metrics indicative of an upgrade of its BCA include adjusted
FFO interest coverage, after considering recurring government payments
and subsidies, exceeding 2.5x on a sustained basis.
The rating could be downgraded if (1) the likelihood of government support
for Shuifa decreases; (2) Shuifa's standalone credit profile weakens
meaningfully; or (3) there is a material weakening in Shuifa's policy
functions.
Shuifa's BCA could be downgraded if (1) there are material negative changes
in the regulatory framework for water utilities and local state-owned
enterprises; (2) Shuifa further engages in risky non-water
utilities commercial operations; (3) it undertakes significant debt-funded
mergers and acquisitions with weaker state-owned enterprises or
privately-owned enterprises; or (4) its financial metrics
weaken for a prolonged period.
Financial metrics indicative of a downgrade of its BCA include adjusted
FFO interest coverage, after considering recurring government payments
and subsidies, falling below 1.25x for a prolonged period.
The methodologies used in this rating were Regulated Water Utilities published
in June 2018, and Government-Related Issuers published in
June 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
Established in 2009, Shuifa Group Co., Ltd.
is the sole financing and operating entity in Shandong province for water
utilities and water-related construction, controlling key
water sources and reservoirs within the province. The company is
also engaged in environmental services, clean energy, modern
agriculture and other businesses.
Shuifa is 100% ultimately owned by the Shandong provincial government,
through a 70% stake held by the Shandong State-Owned Assets
Supervision and Advisory Commission (SASAC), a 20% stake
by Shandong Guohui Investment Co., Ltd. (Baa2 stable),
and a 10% stake by Shandong Social Security Fund.
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
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 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.
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: 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
