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Rating Action:

Moody's assigns first-time Ba1 rating to Kunming Municipal Urban Construction

 The document has been translated in other languages

04 Oct 2019

Hong Kong, October 04, 2019 -- Moody's Investors Service has assigned a first-time Ba1 corporate family rating (CFR) to Kunming Municipal Urban Construction Investment & Development Company Limited (KMUCID).

Moody's has also assigned a Ba1 senior unsecured rating to the proposed USD notes to be issued by KMUCID.

The rating outlook is stable.

Moody's expects that KMUCID will complete the note issuance upon satisfactory terms and conditions, including proper registrations with the National Development and Reform Commission and the State Administration of Foreign Exchange in China (A1 stable).

The proceeds from the proposed notes will be used by KMUCID for general corporate purposes and to repay existing debt.

RATINGS RATIONALE

KMUCID's Ba1 CFR combines (1) its b1 Baseline Credit Assessment (BCA); and (2) Moody's assessment of a strong likelihood of support from, and a high level of dependence on the Kunming Municipal Government, and ultimately the Government of China (A1 stable), when needed, which results in a rating that is three notches above its BCA.

"Moody's support assessment reflects KMUCID's leading role in primary land development and infrastructure construction in Kunming City, its ultimate 100% ownership by the Kunming State-owned Assets Supervision and Administration Commission (SASAC), and the track record of government support," says Ying Wang, a Moody's Vice President and Senior Analyst, and Moody's International Lead Analyst for KMUCID.

KMUCID is mainly engaged in (1) primary land development; and (2) infrastructure construction in Kunming, on behalf of the municipal government. The company is also involved in the construction and maintenance of underground utility tunnels for power, water, gas and telecommunications pipelines in the city, and in property development.

Moody's support assessment also considers the reputational and contagion risks that could arise if KMUCID were to default, given its status as the fifth largest financing platform owned by the Kunming SASAC by asset size, and second largest by total revenue.

Therefore, Moody's believes the Chinese central government would support efforts by the Kunming city and Yunnan provincial governments to prevent KMUCID from defaulting, and thereby avoiding disruption to the domestic financial markets. Such 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 KMUCID and the central government are exposed to common political and economic event risks.

"KMUCID's BCA is driven by the strong and recurring government cash payments it receives each year to support its investments and debt servicing," says Mike Zhu, a Moody's Assistant Vice President and Analyst, and also Moody's Local Market Analyst for KMUCID.

During 2016-18, KMUCID received average annual cash payments of around RMB7 billion from the municipal government, in the form of operating subsidies, capital injections and the return of land sale proceeds. Moody's expects the municipal government will continue to pay a similar level of cash payments over the next two years.

KMUCID's BCA is constrained by (1) the company's high exposure to non-bank financing channels and high financing costs; and (2) its sizeable external guarantees to support other state-owned enterprises (SOEs) of the Kunming government. Moody's has included these payment guarantees -- which accounted for 43% and 38% of total adjusted debt at the end of 2018 and at the end of June 2019, respectively -- in its debt calculations.

KMUCID's liquidity profile is weak. Its cash and cash equivalents of around RMB838 million at the end of 2018 and expected government cash payments of around RMB6.7 billion in 2019 will be inadequate to cover the RMB8 billion of planned investments and RMB4.6 billion in debt maturing over the next 12 months. But Moody's expects the company will arrange new debt to refinance its maturing debt. The proposed new notes will be partially used to refinance existing debt.

In terms of governance risk, the company is not a listed company and its information transparency around its investment strategy and financial policy is weaker than those of public listed companies. However, this risk is partially mitigated by the fact that the company is 100% owned, supervised and monitored by the Kunming SASAC of Yunnan Province, China.

The stable ratings outlook reflects (1) the stable outlook on China's A1 sovereign rating; and (2) Moody's expectation that KMUCID will continue to receive strong and recurring government cash payments and that the company will be able to refinance its debt.

Moody's could upgrade the ratings if (1) the likelihood of government support for KMUCID increases; and/or (2) KMUCID's BCA improves.

Moody's could upgrade KMUCID's BCA if the company shows (1) a track record of stable revenue growth in its property businesses; (2) an improved liquidity position with a significant reduction in non-bank financing; (3) a substantial decrease in guarantees to other SOEs; and (4) improved credit metrics.

Credit metrics indicative of upward pressure on its BCA include adjusted debt/capitalization falling below 60% and adjusted (FFO from non-government transactions + government cash payments + interest)/interest) remaining strong, and at least above the 2017-18 levels.

Moody's could downgrade the ratings if (1) the likelihood of support for KMUCID decreases; and/or (2) KMUCID's BCA is downgraded.

Moody's could downgrade KMUCID's BCA if the company shows a significant deterioration in its business or financial profile due to (1) a reduction in cash flows from the government beyond Moody's expectations; (2) aggressive investments; (3) material payouts to meet external guarantee obligations; or (4) a significantly weakened liquidity position.

Credit metrics indicative of downward pressure on its BCA include adjusted debt/capitalization rising above 75% and adjusted (FFO from non-government transactions + government cash payments + interest)/interest falling below 2.0x on a sustained basis.

The methodologies used in these ratings 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.

Kunming Municipal Urban Construction Investment & Development Company Limited is 100% ultimately owned by the Kunming municipal government (84% direct ownership and 16% through Kunming Development Investment Group). The key members of KMUCID's management are appointed by the Kunming SASAC. The company is the major investment and financing platform for primary land development and urban infrastructure construction in Kunming, and reported assets of RMB65.2 billion and revenue of RMB4.6 billion in 2018.

The local market analyst for these ratings is Mike Zhu, +86 (010) 631-96506.

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.

Ying Wang
Vice President - Senior Analyst
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

Peter Choy
Senior Vice President
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
Client Service: 852 3551 3077

No Related Data.
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