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Rating Action:

Moody's downgrades Beijing Capital Group's ratings to Baa3; outlook negative

 The document has been translated in other languages

17 May 2016

Hong Kong, May 17, 2016 -- Moody's Investors Service has downgraded the issuer rating of Beijing Capital Group Co., Ltd. (Capital Group) to Baa3 from Baa2.

At the same time, Moody's has downgraded the backed senior unsecured rating on the bonds issued by Beijing Capital Polaris Investment Co. Ltd. and guaranteed by Capital Group to Baa3 from Baa2.

The ratings outlook is negative.

This concludes the ratings review initiated on 29 February 2016.

RATINGS RATIONALE

"The downgrade of Capital Group's ratings reflects its high debt leverage, which is primarily a result of the fast debt-funded expansion in its property and environmental protection businesses in 2015, and the slower-than-expected progress in its asset disposals," says Kaven Tsang, a Moody's Vice President and Senior Credit Officer.

Capital Group's Baa3 rating combines its baseline credit assessment (BCA) of ba3, lowered from ba2, and three notches of uplift for expected support of the Beijing municipal government (unrated) under Moody's joint default analysis approach for government-related issuers.

Capital Group's total adjusted debt rose 31.8% year on year to RMB122.6 billion at end-2015 from RMB93 billion at end-2014. As a result, its debt leverage -- as measured by adjusted net debt/EBITDA - rose to 8.7x at end-2015 from 7.2x at end-2014.

The increase in leverage reflects the debt-funded expansion of Beijing Capital Land Limited (Ba3 negative), Capital Group's core property arm, which has been active in buying land in major cities in the past 1-2 years as it repositions its business to focus on the major cities.

Beijing Capital Co., Ltd. (unrated), the group's core unit investing in environmental protection businesses, has also been actively acquiring businesses both overseas, including waste management businesses in New Zealand and Singapore, and in China.

While we expect the group's revenue growth, mainly supported by growth in its property business and accelerated asset disposal plans, including non-core assets and property projects in Daxing district, Beijing, will help lower its net debt/EBITDA moderately back to around 7.5x-8.0x in the next 1-2 years, this level of leverage remains weak for its BCA.

Despite the high leverage, Capital Group's ba3 BCA reflects the following strengths:

(1) its diversified portfolio, with four major businesses that exhibit different industry cyclicality, thus reducing its risk exposure to any individual business segment;

(2) the company's water services and infrastructure businesses, which provide a strong and stable source of income and buffer against the volatility associated with its real estate business; and

(3) its diversified funding channels and good access to domestic funding, given its close linkages with the Beijing municipal government.

The three-notch uplift reflects our assessment of a high likelihood of support from the Beijing municipal government in times of stress, owing to (1) Capital Group's full ownership by the Beijing municipal government; (2) Capital Group's important role in providing essential water supplies, social housing and subway services to China's capital city and its policy functions of supporting small- and medium-sized enterprises and the agricultural sector through its financial services operations; and (3) a strong track record of support from the Beijing municipal government, including asset injections of land, recurring subsidies, and capital injections of around RMB6.4 billion in 2014.

The negative outlook reflects: (1) the uncertainty around Capital Group's deleveraging process; and (2) the negative outlook on China's Aa3 sovereign rating and the potential for weaker-than-expected support from the Beijing municipal government over time, given the ongoing reform process in China and increasing evidence that both the central and local governments will gradually expect state-owned enterprises to continue operating in commercial areas without state support.

An upgrade is unlikely in the near term, given the negative outlook and Capital Group's high debt leverage. However, the outlook could return to stable if: (1) China's sovereign rating returns to stable and Moody's believes that support for Capital Group from the municipal government remains a priority that is unlikely to change despite the ongoing reform efforts; and (2) Capital Group lowers its leverage, with net debt/EBITDA improving to around 7.0x-7.5x.

On the other hand, downward rating pressure could emerge if: (1) Moody's believes that support from Beijing municipal government has weakened; (2) China's sovereign rating is downgraded, resulting in a change in Moody's assessment of Beijing municipal government's credit profile; and/or (3) Capital Group's credit profile materially deteriorates.

Credit metrics indicating downward ratings pressure include adjusted net debt/EBITDA failing to trend below 7.5x by end-2017.

The principal methodology used in rating Beijing Capital Group Co., Ltd. was Homebuilding And Property Development Industry published in April 2015. Other methodologies used include the Government-Related Issuers methodology published in October 2014. The principal methodology used in rating Beijing Capital Polaris Investment Co. Ltd. was Homebuilding And Property Development Industry published in April 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Founded in 1994, Beijing Capital Group Co., Ltd. is 100% owned by the Beijing Municipal Government and is under the direct supervision of the State-Owned Assets Supervision and Administration Commission of the Beijing Municipality. It has four major business segments: (1) environmental protection; (2) infrastructure; (3) real estate; and (4) financial services.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Kaven Tsang
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

Moody's downgrades Beijing Capital Group's ratings to Baa3; outlook negative
No Related Data.
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