Hong Kong, July 22, 2020 -- Moody's Investors Service has assigned a Baa3 senior unsecured rating
to the USD notes to be issued by Taihu Pearl Oriental Company Limited,
and unconditionally and irrevocably guaranteed by Huzhou City Investment
Development Group Co., Ltd (Huzhou City Group, Baa3
stable).
The rating outlook is stable.
Huzhou City Group plans to use the proceeds of the proposed notes to refinance
the company's existing debt.
RATINGS RATIONALE
The Baa3 rating on the proposed notes reflects the irrevocable and unconditional
guarantee to be provided by Huzhou City Group.
Huzhou City Group's Baa3 issuer rating 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 Huzhou City Government and ultimately the Government of
China (A1 stable) in times of need, resulting in a rating that is
three notches above its BCA.
Moody's government support assessment reflects Huzhou City Group's important
role as a major infrastructure developer and provider of utilities and
public services, such as water and gas supply, social housing
and property management service, in Huzhou City, Zhejiang
Province.
In addition, the support assessment considers the company's 100%
ownership by the Huzhou City State-Owned Assets Supervision and
Administration Commission (SASAC) and its track record of receiving government
support such as capital and asset injections, and interest subsidy.
The support assessment also considers the reputational and contagion risks
that may arise if Huzhou City Group were to default, given its status
as the largest state-owned enterprise by assets in Huzhou City.
As such, Moody's believes the central government would support efforts
by the local government to prevent Huzhou City Group from defaulting,
thereby avoiding disruption to the domestic financial market. Such
support can take various forms, including government subsidies,
capital or asset injections, and loans from policy and state-owned
banks.
The high dependence level reflects the fact that Huzhou City Group and
the central government are exposed to common political and economic event
risks.
Huzhou City Group's ba3 BCA is driven by: (1) its dominant position
in both infrastructure construction and water and gas supply in Huzhou
City; (2) the recurring and strong government cash payments to cover
the company's investment needs; and (3) Huzhou City Group's good
access to domestic funding channels, including bank loans and debt
capital markets.
At the same time, Huzhou City Group's BCA is constrained by its
exposure to commercial businesses such as the recently launched commodity
trading business. Such businesses are exposed to market volatilities
and policy risks, although their current scale is small.
Moody's estimates that Huzhou City Group's cash and cash equivalents
at the end of 2019, together with its expected government cash payments,
are sufficient to cover its maturing debt, investments and working
capital needs over the next 12 months. Moody's expects Huzhou City
Group to maintain its good access to domestic and international funding
channels, because it has relatively low funding costs and minimal
exposure to non-standard financing channels such as trusts and
leasing companies.
Moody's has considered the following environmental, social and governance
(ESG) factors in its assessment.
Huzhou City Group bears high social risks as it implements public-policy
initiatives by building public infrastructure in Huzhou city. Demographic
changes, public awareness and social priorities shape Huzhou City
Group's development targets and ultimately affect the Huzhou government's
willingness to support Huzhou City Group.
In terms of governance risk, Huzhou City Group is entirely owned
and controlled by the Huzhou government and there is low predictability
in respect of the investments it will make, along with limited information
transparency regarding its investment strategy and financial policy.
These issues are mitigated by (1) the supervision and close monitoring
exercised by the Huzhou government, (2) the close alignment of the
company's operations with the city's public-service initiatives
and (3) that Huzhou City Group discloses its annual reports and quarterly
financials in the domestic bond market.
The stable rating outlook reflects (1) the stable outlook on China's A1
sovereign rating, and (2) Moody's expectation that Huzhou City Group
will continue to receive strong and recurring government support.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's would upgrade the notes' rating if Huzhou City Group's
issuer rating is upgraded.
Moody's could upgrade Huzhou City Group's issuer rating if the likelihood
of government support increases and Huzhou City Group's BCA improves,
such that: (1) its operating cash flow and government cash payments
materially exceed Moody's expectation and consistently cover its investment
needs, and (2) it maintains its strong liquidity.
Moody's would downgrade the notes' rating if Huzhou City Group's
issuer rating is downgraded.
Moody's could downgrade Huzhou City Group's issuer rating if the
likelihood of government support weakens or Huzhou City Group's BCA deteriorates,
as indicated by: (1) lower-than-expected government
cash payments and higher-than-expected investments especially
in the commercial sector; or (2) a weakened funding access with increased
reliance on non-standard financing channels.
The methodologies used in this rating were Business and Consumer Service
Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
Huzhou City Investment Development Group Co., Ltd (Huzhou
City Group) was established in 1993 as a local state-owned-enterprise
to undertake infrastructure projects and provide utilities and public
services, such as water and gas supply, social housing and
property management service in Huzhou City, Zhejiang Province.
In 2019, the company reported assets of RMB 93 billion and revenue
of RMB 7.6 billion.
The local market analyst for this rating is Elaine Lai, +86
(212) 057-4018.
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
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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,
and whose ratings may change as a result of this credit rating action,
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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
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am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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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.
Danny Chan
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Hong Kong
China (Hong Kong S.A.R.)
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
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Client Service: 852 3551 3077
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