Hong Kong, April 11, 2022 -- Moody's Investors Service has assigned a Baa3 senior unsecured rating to the proposed USD bonds to be issued by Chouzhou International Investment Limited, a wholly owned subsidiary of Yiwu State-owned Capital Operation Co., Ltd. (YSCO, Baa3 stable).
The Baa3 rating on the senior unsecured bonds reflects the unconditional and irrevocable guarantee from YSCO and the fact that the guarantee is ranked pari passu with YSCO's other senior unsecured obligations.
The rating outlook is stable.
YSCO plans to use the proceeds of the proposed bonds for refinancing existing offshore debt.
RATINGS RATIONALE
YSCO's Baa3 issuer rating is based on Yiwu government's capacity to support (GCS) score of baa2, and Moody's assessment of how the company's characteristics affect the Yiwu government's propensity to support, resulting in a one-notch downward adjustment.
Moody's assessment of Yiwu government's capacity to support reflects (1) Yiwu's status as a county-level city, one of the lower administrative levels in Moody's assessment of the hierarchy of regional and local governments (RLGs) in China (A1 stable); and (2) its relatively high state-owned enterprise (SOE)-related contingent liability risks.
YSCO's Baa3 rating also reflects the Yiwu government's propensity to support the company, given (1) the company's ultimate control by the Yiwu government; (2) its status as the largest local government financing vehicle (LGFV) in Yiwu city by asset size, managing around 90% of state-owned assets in the city; (3) the company's dominant role in providing essential public services, including shantytown projects, affordable housing and public infrastructure projects for the government and its monopoly in urban utility services and public transportation; (4) its track record of government payment and strong access to funding.
However, the one-notch downward adjustment from Yiwu government's GCS reflects the contingent risk related to the external guarantees provided by YSCO to other local SOEs in Yiwu, and its debt position compared with government payments.
The rating also takes into account the following environmental, social and governance (ESG) factors.
YSCO is exposed to low environmental risks via its infrastructure projects. Such risks could be moderated by environmental studies and planning before the commencement of projects, and close supervision during the construction phase.
YSCO bears high social risks as it implements public policy initiatives by building public infrastructure in Yiwu city. Demographic changes, public awareness and social priorities shape YSCO's development targets and ultimately affect the Yiwu government's propensity to support the company.
Governance considerations are also material to the rating as YSCO is subject to oversight by the Yiwu government and has to meet several reporting requirements, reflecting its public-policy role and status as a government-owned entity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
YSCO's stable rating outlook reflects (1) the stable outlook on China's sovereign rating; (2) Moody's expectation that the Yiwu government's capacity to support will remain stable; (3) Moody's view that the company's business profile, as well as its integration with and the control and oversight provided by the Yiwu government, will remain largely unchanged over the next 12-18 months.
The rating could be upgraded if China's sovereign rating is upgraded, or the Yiwu government's capacity to support strengthens as a result of significant strengthening of its economic and financial profile, or its ability to coordinate timely support. An upgrade is also possible if YSCO's characteristics change in a way that strengthens the Yiwu government's propensity to support, such as an increase in government payments and an improvement in the predictability of the government payment mechanism; for example, dedicated fiscal budget allocations and transfers from higher-tier governments that can consistently cover a large share of its operational and debt servicing needs.
The rating could be downgraded if China's sovereign rating is downgraded, or the Yiwu government's capacity to support weakens as a result of a significant weakening of its economic and financial profile, or its ability to coordinate timely support. A downgrade is also possible if there are changes in the Chinese government policies that prohibit RLGs from providing financial support to LGFVs; or YSCO's characteristics change in a way that weakens the Yiwu government's propensity to support, such as:
- Material changes in its businesses, including substantial expansion into commercial activities at the cost of public services, or substantial losses in commercial activities;
- A decline in its position as the largest and dominant public service provider in Yiwu City;
- A rapid increase in its debt and leverage, with fewer corresponding government payments;
- A significant increase in loans, guarantees or other credit exposures to external parties, wherein the contingent liabilities will account for a high proportion of its equity base.
The principal methodology used in this rating was Local Government Financing Vehicles in China Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216254. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Yiwu State-owned Capital Operation Co., Ltd. (YSCO) is 90.56% owned by the Yiwu government and 9.44% owned by Zhejiang Finance Development Co., Ltd. The company is mainly engaged in various essential public services, including urban infrastructure construction, shantytown renovation, affordable housing projects, and the provision of urban utility services and public transportation. The company is the largest state-owned enterprise in the city, accounting for around 90% of the Yiwu's government's state-owned assets. The company reported total assets of RMB220.1 billion as of the end of the third quarter of 2021 and total revenue of RMB16.5 billion in the first three quarters of 2021.
The local market analyst for this rating is Sarah Xu, +86 (21) 2057-4030.
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 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.
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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235 .
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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
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Corporate Finance Group
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
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Ivan Chung
Associate Managing Director
Corporate Finance Group
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