Hong Kong, February 10, 2020 -- Moody's Investors Service has assigned a Baa3 senior unsecured rating
to the proposed USD notes to be issued by Chouzhou International Investment
Limited, and unconditionally and irrevocably guaranteed by Yiwu
State-owned Capital Operation Co., Ltd. (YSCO,
Baa3 stable).
The rating outlook is stable.
YSCO plans to use the proceeds of the proposed notes 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 to be 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 Yiwu government
and ultimately the Government of China (A1 stable) in times of need,
which results in a rating that is three-notch above 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 small commodity trading centers
that are of strategic importance to China's One Belt One Road initiative;
(3) its undertaking of shanty town, 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 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 believes the central government will support efforts
by the Zhejiang provincial government and the Yiwu city government to
prevent YSCO from defaulting and thus avoid disruption to the domestic
financial markets. 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 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.
YSCO's small commodity trading centers reported stable operations in the
first half of 2019, with around RMB997 million in recurring net
rental income, which we estimate covered around 47% of YSCO's
adjusted interest expense over the same period.
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.
Moody's estimates that YSCO spent around RMB12.4 billion
in capital expenditure and investments in the first half of 2019,
slightly up from the level in the same period in 2018, and in turn
raising its debt.
Moody's expects YSCO's capital expenditure and investments will stay around
RMB20 billion in 2020, further raising its debt to around RMB110
billion by the end of 2020 from RMB90 billion in 2018. Consequently,
Moody's expects adjusted FFO interest coverage (including government grants)
to weaken to 3x by the end of 2020 from around 3.6x in 2018.
Nevertheless, these weaker metrics will still support its ba3 BCA
compared with the rated peers.
YSCO had around RMB19.6 billion cash at the end of June 2019,
which could cover around 68% of its estimated maturing debt of
RMB29 billion in the next 12 months. 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.
In terms of environment, social and governance (ESG) factors,
we do not see environmental or social issues as material to YSCO's
ratings. With respect to governance factor, there is low
predictability in respect of the investments YSCO will make, and
limited information transparency regarding its investment strategy and
financial policy. These concerns are mitigated by the company's
supervision and monitoring by the Yiwu government and the close alignment
of the company with the public policy initiatives of Yiwu city.
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 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 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, an increased exposure to risky commercial businesses,
or weakened access to funding.
Credit metrics indicative of downward pressure on its BCA include (1)
a much larger-than-expected debt increase; (2) its
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 this rating 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 reported assets totaled RMB175 billion at 30 June 2019.
The local market analyst for this rating is Elaine Lai, +86
(212) 057-4018.
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
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the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
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for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
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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.
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
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