On August 23, 2018, the press release was corrected as follows: the following was added as the third paragraph of the Regulatory Disclosures section: 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 entities are participating and the rated entities or their agent(s) generally provide 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. Revised release follows.
Hong Kong, August 20, 2018 -- Moody's Investors Service has assigned a first-time Baa1 issuer
rating to Shanghai Lingang Economic Development (Group) Co.,
Ltd.
Moody's has also assigned a Baa1 rating to the proposed USD senior unsecured
notes to be issued by Lingang Wings Inc. and guaranteed by Shanghai
Lingang.
The ratings outlook is stable.
The proceeds from the notes will be used for funding certain projects
of the group and for working capital purposes.
RATINGS RATIONALE
Shanghai Lingang's Baa1 issuer rating considers its baseline credit assessment
(BCA) of ba2 as well as the potential for support in times of stress,
based on the assumption of a very high dependence on and high level of
support from its local government owner, resulting in a four-notch
uplift from its BCA.
This approach -- which considers first the company's standalone
profile -- recognizes that the entity is not guaranteed
by its local government owner, which is therefore not obliged to
directly support the company's debt. However, given the company's
importance, Moody's expects there is a high likelihood that
the company will receive support to stabilize its credit profile in times
of need. This support could take the form of government subsidies,
capital or asset injections, bank lending from state-owned
institutions or other forms of support.
Moody's support assessment reflects Shanghai Lingang's leading role in
investments, development and operations in industrial areas for
the Shanghai Government, which ultimately owns 100% of the
company. The support assessment also considers the reputational
and contagion risks that may arise if it were to default, given
its status as one of nine functional state-owned enterprises (SOEs)
in Shanghai City. As such, we believe the relevant authorities
would support efforts of the city to seek ways to prevent a Shanghai Lingang
default and thus avoid the risk of disruption to the domestic financial
market that might occur otherwise.
Shanghai Lingang is mandated by the Shanghai Government to develop and
operate the Lingang Industrial Area and Caohejing High-Tech Park,
including primary land development, infrastructure construction,
as well as the construction of affordable housing. In carrying
out its public mandate, the company also works to attract investment
into these areas and provides industrial and office properties,
at below market rental rates if necessary, for companies moving
into the estates.
These features have prompted Moody's to categorize the company in the
"Commercial Public Sector".
Moody's believes that Shanghai Lingang is likely to be supported in times
of need, based on the following considerations:
1) Shanghai Lingang is the only municipal government-owned entity
that focuses on investments, development and operations of industrial
areas under the Shanghai Government.
2) Lingang Industrial Area and Caohejing High-Tech Park are ranked
among the top development areas in Shanghai, and are therefore economically
important to the city, which represents the nationwide hub for science
and technology innovation. The Lingang Industrial Area also forms
a component of the national "Yangzi River Economic Belt" strategy,
given its important geographic location and proximity to the Yangshan
International Deep-Water Port.
3) The track record of support: a) around RMB15.85 billion
(or 44% of the company's total debt) was classified as direct government
liabilities at the end of 2014 and has been fully refinanced through government
debt swaps during the past three years; b) the company has received
ongoing subsidies, grants, cash injections and refund of land
sales from the Shanghai Government amounting to RMB2.5 billion
per annum over the past five years; and c) the pre-funding
arrangement by the Shanghai Government to cover the company's primary
land and infrastructure cost incurred on behalf of the government.
These factors are counterbalanced by the uncertainty arising from ongoing
changes in the central government's policy regarding support from
regional and local governments to their SOEs.
Shanghai Lingang's BCA is driven by the stable recurring rental
cash flow generated by its industrial and office property portfolio,
limited business risk due to its monopoly market position in the city's
industrial areas, and strong access to domestic funding.
These such credit strengths are partly offset by the company's moderately
high financial leverage.
The stable rental income generated from mature industrial areas —
which accounted for approximately 20% of the company's total
revenue — led to strong coverage of recurring rental income to total
interest expense, including capitalized interest, of 1.3x
in 2017. While this ratio will likely decline slightly to around
1.0x-1.1x over the next 1-2 years due to rising
interest expenses from a likely increase in its debt leverage, this
level of coverage is strong among Ba-rated Chinese corporates,
and partly mitigates the risk arising from the volatility of Shanghai
Lingang's industrial property development business.
When compared to industrial peers operating in a commercially competitive
environment, Shanghai Lingang faces relatively low business risk,
due to its monopoly market position in the Lingang Industrial Area and
Caohejing High-Tech Park, as well as its role in implementing
the government's public mandate.
Shanghai Lingang also demonstrates strong access to diversified sources
of domestic funding, as evidenced by its multiple onshore banking
relationships, track record of tapping the onshore debt capital
markets, and raising of onshore equity capital in the stock market
via its 46.09%-owned listed subsidiary, Shanghai
Lingang Holdings Co., Ltd.
However, its standalone credit profile is constrained by the likely
increase in its debt leverage. Moody's expects that Shanghai
Lingang's debt leverage — as measured by adjusted debt/capitalization
— will rise to around 60% over the next 12-18 months
from around 54% in 2017, as it continues to make sizable
investments in industrial property development to satisfy demand from
companies moving into the industrial areas.
The stable outlook incorporates Moody's expectation that over the next
12-18 months (1) Shanghai Lingang's credit metrics will remain
at levels appropriate for its ba2 BCA; and (2) its importance to
the Shanghai Government will remain intact.
Moody's will upgrade the rating if the company's BCA improves, without
any material changes in the support assessment.
Moody's will raise the company's BCA if it improves its financial profile
by strengthening cash flow and reducing debt. Credit metrics indicative
of upward pressure on the BCA include: (1) adjusted EBIT/interest
ratio — including the government grants and cash injection —
exceeding 3.5x on a sustained basis; and (2) adjusted debt/capitalization
below 45% on a sustained basis.
Moody's would downgrade the rating if the company's BCA is lowered because
of a material deterioration in its business or financial profile,
without any material change in the support assessment.
Credit metrics indicative of downward pressure on its BCA include:
(1) adjusted EBIT/interest below 2.0x; and (2) adjusted debt/capitalization
above 65% on a sustained basis.
A downgrade of Shanghai Lingang's rating — without a lowering
of its BCA — could also be triggered by a change in Moody's support
assessment, for example, if the company expands its commercial
activities, leading to a reduction in its importance to the Shanghai
Government.
The methodologies used in these ratings were Homebuilding and Property
Development Industry published in January 2018, and Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Established in 2003, Shanghai Lingang Economic Development (Group)
Co., Ltd. is 51.70% directly owned by
the State-owned Assets Supervision and Administration Commission
of Shanghai (Shanghai SASAC) and 2.15% owned by the Shanghai
Pudong New Area SASAC via a district state-owned enterprise.
The remaining 46.15% share in the company is owned by several
state-owned enterprises which are also 100% owned by the
Shanghai SASAC.
Consequently, Shanghai Lingang is ultimately 100% owned by
the Shanghai Government. The company is mandated by the same government
to develop industrial areas mainly in Shanghai, including primary
land development, infrastructure construction, as well as
the building of affordable housing and industrial property.
The Local Market analyst for these ratings is Cindy Yang, +86
(10) 6319-6570.
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.
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 entities are participating and the rated entities or their agent(s) generally provide 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.
Franco Leung
Associate Managing Director
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
Client Service: 852 3551 3077
