Hong Kong, October 29, 2019 -- Moody's Investors Service has assigned a first-time issuer
rating of Baa3 to Lanzhou Construction Investment (Holding) Group Co.,
Ltd. (LCIG).
In addition, Moody's has assigned a Baa3 senior unsecured
rating to the proposed USD notes to be issued by LCIG's subsidiary,
City Development Company of Lan Zhou (CDL), which is unconditionally
and irrevocably guaranteed by LCIG.
The rating outlook is stable.
The proceeds from the proposed issuance will be used by CDL for onshore
projects development, debt refinancing and general corporate purposes.
RATINGS RATIONALE
LCIG's Baa3 issuer rating combines its ba3 Baseline Credit Assessment
(BCA) and a three-notch uplift reflecting the strong likelihood
of support from, and a high level of dependence on, the Lanzhou
Municipal Government and ultimately the Government of China (A1 stable)
in times of need.
"Moody's support assessment reflects LCIG's role as
a key player in infrastructure construction and shantytown development,
and in providing utilities and other public services in Lanzhou City,
Gansu Province, China," says Ying Wang, a Moody's
Vice President and Senior Analyst and the Lead Analyst for LCIG.
In addition, the assessment considers the company's 100%
ownership by the Lanzhou State-Owned Assets Supervision and Administration
Commission (Lanzhou SASAC) and the track record of recurring cash payments
from the government.
Moody's support assessment has also considered the wide-reaching
reputational and contagion risks that could arise if LCIG were to default,
as it is one of the largest local government financing vehicles (LGFVs)
in Lanzhou City. Therefore, Moody's believes the central
government is likely to support Lanzhou Municipal Government's efforts
in preventing LCIG from defaulting to avoid disrupting the domestic financial
markets. This support can take various forms, including debt
swaps for the company's infrastructure-related loans,
government subsidies, capital or asset injections, and loans
from policy and state-owned banks.
The high dependence level reflects the fact that LCIG and the central
government are exposed to common political and economic event risks.
LCIG's BCA is driven by (1) the stable and recurring cash payment
from the local and central governments to support LCIG's ongoing
infrastructure business and debt repayments; and (2) the company's
dominant position in providing utilities and public services in Lanzhou.
However, LCIG's BCA is constrained by its high debt leverage.
LCIG acts as a re-lender to lower tier LGFVs in Lanzhou City of
shantytown development loans from the China Development Bank (CDB,
A1 stable). While this re-lending has resulted in a high
debt burden, the associated risks are somewhat mitigated by the
fact that the Lanzhou Municipal Government bears ultimate responsibility
for repaying these loans. Moody's estimates that re-lending
loans from CDB accounted for around 33% of LCIG's total adjusted
debt at the end of 2018.
Moody's expects LCIG's adjusted debt will increase by 9%
and 8% in 2019 and 2020 respectively, driven by re-lending
loans, which will in turn moderately raise adjusted debt/capitalization
to 80% by the end of 2020 from 73% at the end of 2018.
At the same time, LCIG's adjusted (funds from operation [FFO]
from nongovernment activities + government cash payments + interest)/interest
should stay around 1.2x over the next 1-2 years.
However, excluding the re-lending loans from CDB and the
associated interest payments, Moody's estimates LCIG's
adjusted debt/capitalization would fall to around 71%, while
its interest coverage ratio would be around 1.5x by the end of
2020. These metrics are appropriate for its ba3 BCA.
LCIG's liquidity is weak. Its cash and cash equivalents at
the end of June 2019 and expected cashflows from the government were insufficient
to cover its cash interest expenses, planned investments and maturing
debt over the next 12 months.
However, Moody's considers LCIG's refinancing risk to
be manageable because it has access to domestic banks and diversified
funding channels in the onshore debt capital market as a major SOE in
Lanzhou City.
In terms of governance risk, the company is not a listed company
and Moody's views its information transparency around its investment
strategy and financial policy is weaker than those of publicly listed
companies, which is incorporated in the company's Baa3 rating,
but the company is supervised and monitored by Lanzhou SASAC.
The stable rating outlook reflects (1) the stable outlook on China's
A1 sovereign rating; and (2) Moody's expectation that LCIG
will continue to receive strong and recurring government support.
Moody's could upgrade the rating if (1) the likelihood of government support
for LCIG increases; and (2) LCIG's BCA further improves.
Moody's could upgrade LCIG's BCA if (1) the company's
business or financial profile improves, (2) its gross cash flows
from the government materially exceed our expectations, or (3) its
debt level materially decreases, including reductions in re-lending
loans to other LGFVs.
Credit metrics indicative of upward rating pressure on its BCA include
adjusted debt/capitalization falling below 65% on a sustained basis.
Moody's could downgrade the rating if (1) the likelihood of government
support for LCIG decreases; or (2) LCIG's BCA deteriorates.
Moody's could lower LCIG's BCA if there is a material deterioration
in its business or financial profile, due to lower-than-expected
government cash payments or higher-than-expected investment
needs.
Credit metrics indicative of downward pressure on its BCA include (1)
adjusted debt/capitalization rising above 80% for a prolonged period;
or (2) adjusted (FFO from non-government transactions + government
cash payments + interest)/interest falling below 1.2x-1.5x
for a prolonged period.
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.
Lanzhou Construction Investment (Holding) Group Co., Ltd.
is 100% owned by Lanzhou Investment Holding Group Company,
which is in turn 100% owned by the Lanzhou State-Owned Assets
Supervision and Administration Commission. The Lanzhou Municipal
Government has tasked the company with handling infrastructure and shantytown
development projects in Lanzhou City. The company reported total
assets and revenues of RMB129 billion and RMB5.8 billion,
respectively, at the end of 2018.
CDL is 97.1% owned by LCGI and 2.9% owned
by the China National Development Fund. CDL is the main operating
entity under LCIG, undertaking infrastructure construction and shantytown
development projects on behalf of Lanzhou City. It also operates
utilities businesses covering gas, water and heating services,
as well as social welfare services including bus transportation networks.
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.
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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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.
Ying Wang
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
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Peter Choy
Senior Vice President
Corporate Finance Group
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Client Service: 852 3551 3077
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