Hong Kong, November 13, 2017 -- Moody's Investors Service has assigned a first-time Baa3
issuer rating to Hunan Xiangjiang New Area Development Group Co.,
Ltd.
The rating outlook is stable.
RATINGS RATIONALE
Hunan Xiangjiang New Area Development Group's Baa3 issuer rating primarily
combines: (1) its b1 baseline credit assessment (BCA); and
(2) Moody's assessment of a high likelihood that the company will receive
extraordinary support from the Changsha Municipal Government (Changsha
Government) in times of need, which provides a four-notch
uplift to its rating.
This support assessment reflects Hunan Xiangjiang New Area Development
Group's important role in the development of the Xiangjiang New Area in
Changsha and the company's 100% ownership by the Changsha Government.
The company is responsible for primary land and infrastructure development
in the Xiangjiang New Area. Some of these projects are partly commercially
viable, but are also linked to the public policy goals of the Changsha
Government.
This situation has prompted Moody's to categorize the company in the "Commercial
Public Sector".
The success of the Xiangjiang New Area is important. The area has
significant provincial and strategic importance as it is the only national-level
"New Area" in Hunan Province.
National-level "New Areas" are special economic development zones
approved by the State Council. These areas are supported with preferential
policies and privileges to encourage and attract new development to speed
up regional economic development.
Moody's therefore believes that Hunan Xiangjiang New Area Development
Group will receive high support from the Changsha Government and indirectly
from the Hunan Provincial Government (Hunan Government), in times
of need, given the reputation risk to the two governments should
the company default.
More specifically, Moody's expectation of a high level of government
support reflects:
• Hunan Xiangjiang New Area Development Group's status as one of
the most important local government-owned entities in Changsha.
It is classified as a functional SOE by the Changsha Government and ranked
No.4 in terms of total assets among SOEs in Changsha at end-2016.
Changsha is in turn the capital city of Hunan Province and the largest
GDP contributor in the province.
• The Xiangjiang New Area's high importance to Changsha city,
as evidenced by the area's material contribution to the Changsha Government
and the local economy. The Xiangjiang New Area contributed about
16% of Changsha city's GDP and 20% of the government's fiscal
revenues in 2016.
• Hunan Xiangjiang New Area Development Group's close financial linkage
with the government, which is also demonstrated by the debt that
is government-related. The company completed government
debt swaps of RMB2.44 billion in 2015 and 2016.
• The government's ongoing subsidies and grants to and cash injections
into Hunan Xiangjiang New Area Development Group.
The BCA of b1 reflects Hunan Xiangjiang New Area Development Group's high
leverage and large exposure to the volatile land market.
Hunan Xiangjiang New Area Development Group has funded the development
of projects mainly with debt under a long payback period from the Changsha
Government. In addition, as the major primary land developer
in the Xiangjiang New Area, the company's large exposure to
the volatile land market will increase its financial risk, given
the uncertainty in the government's land sales schedule and prices,
which are subject to market conditions.
Moody's expects Hunan Xiangjiang New Area Development Group's leverage
will rise in the next 1-2 years, reflecting its sizeable
capex plan. Its adjusted debt/capitalization will likely weaken
to 50%-60% in the next 12-18 months from 41%
in 2016. Moody's estimates around RMB6-7 billion of
annual investment in the next 1-2 years, with the majority
being debt funded.
In addition, the company's adjusted funds from operations
(FFO)/interest coverage - after government grants and subsidies
- will gradually fall to around 1.0x over the same period
from 2.2x in 2016, because of the higher interest expenses
arising from the additional debt required to fund new projects.
Nevertheless, Hunan Xiangjiang New Area Development Group's high
financial risk is partly mitigated by: (1) periodic cash flows from
the Changsha Government in the form of capital injections and government
grants; (2) the provision of recurring government subsidies;
and (3) funding allocations from provincial government bond issuances;
for example, it received RMB300 million from special bonds issued
by the Hunan Government for the development of Yuelu Mountain University
Technology City in the Xiangjiang New Area in August 2017.
Hunan Xiangjiang New Area Development Group has a modest liquidity profile.
Its cash balance of RMB6 billion at end-June 2017 was insufficient
to cover its RMB1.07 billion in short-term debt and estimated
investment needs over the next 12 months. However, the company
has good access to domestic funding channels, including bank loans
and the public bond market, given its strong linkage with the Changsha
Government.
The stable outlook incorporates Moody's expectation that over the
next 12-18 months (1) the company's credit metrics will stay
at levels appropriate for its b1 BCA; and (2) its importance to the
Changsha Government, and the Changsha Government's ability
to provide support, will remain intact.
Moody's will upgrade Hunan Xiangjiang New Area Development Group's rating
if the company's BCA improves, without any material changes in the
support assessment.
Moody's will raise the company's BCA if the company can improve
its financial profile by strengthening cash flow and reducing debt.
Credit metrics that will indicate upward pressure on the BCA include:
(1) adjusted FFO/interest coverage — after government grants and
subsidies — exceeding 2.5x; and (2) adjusted debt/capitalization
below 50% on a sustained basis.
Moody's will downgrade the rating if the company's BCA is lowered
because of a material deterioration in its business or financial profile,
without any material changes in the support assessment.
Credit metrics indicative of downward pressure on its BCA include:
(1) adjusted FFO/interest coverage below 1.0x; and (2) adjusted
debt/capitalization above 70%-75% on a sustained
basis.
A downgrade of Hunan Xiangjiang New Area Development Group's rating —
without a lowering of its BCA — could also be triggered by a reduction
in the company's importance to the Changsha Government, or a weakening
of the Changsha Government's ability to support the company.
The methodologies used in these ratings were Business and Consumer Service
Industry published in October 2016, and Government-Related
Issuers published in August 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Hunan Xiangjiang New Area Development Group Co., Ltd is 100%
owned by the Changsha Municipal Government. The company was formally
established in April 2016, following the consolidation of three
government-owned entities operating in the Xiangjiang New Area.
It engages in primary land and infrastructure development in the Xiangjiang
New Area of Changsha city. Its assets totaled RMB55 billion at
end-September 2017.
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.
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
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
Client Service: 852 3551 3077
