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Rating Action:

Moody's assigns first-time A1 ratings to State Development & Investment Corporation

 The document has been translated in other languages

18 Apr 2017

Hong Kong, April 18, 2017 -- Moody's Investors Service has assigned a first-time A1 issuer rating to State Development & Investment Corporation (SDIC).

At the same time, Moody's has assigned a first-time A1 senior unsecured rating to the proposed USD notes to be issued by Rongshi International Finance Limited and guaranteed by SDIC.

The ratings outlook is negative.

RATINGS RATIONALE

SDIC's A1 issuer rating primarily combines (1) its solid standalone credit quality, as evidenced by its baa3 baseline credit assessment (BCA); and (2) Moody's assessment of the very high likelihood that SDIC will receive extraordinary support from the Chinese government (Aa3 negative) in case of a need, which provides a five-notch uplift to the rating.

Moody's assessment of a very high level of government support takes into consideration the following factors:

1) SDIC's status as a national policy investment company and its close linkage with the central government, as evidenced by the comprehensive strategic cooperation agreement between the National Development and Reform Commission (NDRC) and SDIC. The agreement positions SDIC as an important platform for the NDRC to implement the Chinese government's major policies, such as adjustments to the country's economic structure and alleviating poverty;

2) SDIC's 100% ownership by the central government;

3) SDIC's core investments — such as its hydropower, ports, potash, and financial guarantee businesses — are of high importance to the national economy;

4) SDIC's selection as part of a pilot program for the Chinese government to implement state-owned enterprise (SOE) reforms. For example, SDIC was established as one of the two state-owned asset investment companies in 2014. The government has also previously mandated SDIC to consolidate and restructure a few weaker central SOEs; and

5) SDIC manages a large portfolio of investment funds for central and local government agencies.

"SDIC's baa3 BCA reflects its diversified business portfolio, the strong market positions in its key business segments, such as power generation, ports, financial services and natural resources sectors, sound track record of active asset recycling, and strong access to liquidity," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

"However, its BCA is constrained by its modest financial profile, large investment and capex plan, and the execution risks related to development into new areas," adds Lu, who is also the International Lead Analyst for SDIC.

SDIC's investment portfolio demonstrates broad business diversification, but such a strength is counterbalanced by its geographic concentration in China. Moody's notes that SDIC's portfolio provides the company with diversified sources of dividend income, averaging RMB3.9 billion over the last four years (2013—2016).

Moody's views SDIC as an investment holding company, because of its active investment and disposal activities, and evolving investment portfolio. Moody's expects that SDIC's future investments will continue to be aligned with the Chinese government's industrial policies, such as in relation to the hydropower, advanced manufacturing, healthcare and environmental sectors.

SDIC has a modest financial profile at the holding company level. The holding company has an investment plan totaling around RMB6-RMB7 billion for the next 12 months, which is likely to be funded by dividends from investments, proceeds from asset disposals, government capital injections and new debt.

Moody's expects that SDIC's funds from operations (FFO + Interest)/interest coverage and market value based leverage (MVL) will stay around 1.5x and 40% respectively over the next two years. Such levels are weak for its BCA of baa3.

Nevertheless, SDIC's BCA is supported by its strong access to domestic funding. Most of its debt at the holding company level was obtained from policy banks or the domestic bond market. Around 80% of its debt are associated with tenors of more than three years. In addition, SDIC has abundant credit facilities from its banks, with unused banking facilities of RMB759.2 billion at end 2016.

Due to the propensity to support its core investments, Moody's has also assessed SDIC's consolidated credit metrics and the credit quality of its core investments. Moody's expects that SDIC's consolidated leverage — as measured by adjusted debt/EBITDA and excluding the debt and EBITDA from its financial services businesses, but adding dividend contributions to consolidated EBITDA — will weaken to around 6.5x-7.0x over the next two years.

SDIC's negative rating outlook reflects the negative outlook on China's sovereign rating, and the company's close linkage with the Chinese government.

Moody's could change SDIC's rating outlook to stable if: (1) the outlook on the Chinese government's sovereign rating reverts to stable; or (2) there is a material improvement in SDIC's fundamental credit profile, such that its MVL registers below 30%-35%, (FFO + interest)/interest coverage exceeds 2.0x-2.5x, and adjusted consolidated debt/capital is below 50%-55% on a sustained basis.

But, SDIC's rating could be downgraded if: (1) China's sovereign rating is downgraded or Moody's believes that central government support will weaken; and/or (2) SDIC's standalone credit profile deteriorates, for example, as a result of highly aggressive debt-funded investments or a significant increase in credit contagion risk from its investees.

Financial metrics that Moody's would consider for a downgrade include an MVL higher than 45%-50%, (FFO + interest)/interest coverage lower than 1.2x-1.5x, or adjusted consolidated debt/capital above 65% over a prolonged period.

The principal methodology used in these ratings was Investment Holding Companies and Conglomerates published in December 2015. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Established on 5 May 1995, State Development & Investment Corporation is a state-owned investment holding company, wholly owned by China's State Council. Over the past two decades, it has developed a large investment portfolio, with a portfolio value of around RMB120 billion.

Its core investments are in the power generation, ports and railway, financial services and advanced manufacturing sectors.

The Local Market analyst for this rating is Kai Hu, +86 (21) 2057-4012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

No Related Data.
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