Hong Kong, February 14, 2017 -- Moody's Investors Service has downgraded Beijing Enterprises Holdings
Limited's (BEHL) issuer rating to Baa1 from A3.
At the same time, Moody's has downgraded the issuer rating
of Beijing Enterprises Group (BVI) Company Ltd (BE BVI) to Baa1 from A3.
Moody's has also downgraded the senior unsecured rating for the
bonds guaranteed by BEHL or BE BVI — and issued by Mega Advance
Investments Limited, Talent Yield (Euro) Limited, Talent Yield
Investments Limited and Charter Style International Limited — to
Baa1 from A3.
The outlook on the ratings is stable.
The rating actions conclude Moody's review for downgrade on all
the ratings above, initiated on 9 November 2016.
RATINGS RATIONALE
"The downgrade reflects the significant weakening of BEHL's
standalone credit profile, due to its acquisitive appetite and heightened
business risks, in particular, its acquisition of EEW Holdings
GmbH in March 2016 and announced investment in Verknechonskneftegaz in
November 2016," says Ada Li, a Moody's Vice President
and Senior Analyst.
"BEHL's weakened standalone credit profile is partly offset
by the high level of government and parental support, and the group's
stable and regulated water and gas distribution businesses, resulting
in the one-notch downgrade," adds Li.
BEHL's Baa1 issuer rating incorporates: 1) its standalone
credit strength; and 2) a four-notch uplift, based on
Moody's assessment of parental support from Beijing Enterprises
Group Company Limited (BE Group, unrated), when needed.
As for BE BVI, the company's credit profile is closely linked with
that of BEHL, because the majority of BE BVI's businesses and assets
are held by BEHL.
BEHL paid EUR1.438 billion to acquire 100% of EEW,
a German waste-to-energy company in March 2016. BEHL's
wholly owned subsidiary, Beijing Gas Group Company Limited (unrated),
announced in November 2016 that it would invest a 20% stake in
Verknechonskneftegaz (V-gaz, unrated) for USD1.1 billion.
The overseas acquisition and investment were equivalent to around 14%
of BEHL's reported consolidated assets at end-2015, and Moody's
estimates that they will raise BEHL's adjusted debt by around 60%
at end-2017 from the level seen at end-2015, based
on the understanding that BEHL funded the acquisition mainly by debt.
As a result, Moody's expects that BEHL's adjusted debt/EBITDA and
adjusted debt/book capitalization will rise to around 7.0x and
50% in 2017 from 4.7x and 42% at end-2015.
BEHL's standalone rating also considers its increasing structural
complexity and its heightened business risks in terms of the medium-term
integration risks associated with its recent overseas acquisition and
investment. Moody's is concerned about BEHL's acquisitive
expansion strategies, its ability to manage its newly acquired waste-to-energy
operations and planned investment in upstream oil and gas exploration.
Nevertheless, Moody's also expects that BEHL's core gas and water
treatment businesses will continue to generate stable cash flows to back
the group's rapid expansion, given the supportive government policies
for the two sectors and rising environmental awareness across China.
The weakened standalone credit profile is also partly mitigated by a high
level of support from the Beijing municipal government, through
BEHL's parent, BE Group. Moody's assessment of support
is based on BEHL's commercial-public state-owned enterprise
status, as Beijing's dominant natural gas and water supplier,
backed by the strong branding and relationship between BE Group and the
Beijing Government.
Moody's also notes that the V-gaz transaction further evidences
BEHL's strategic importance to China, given that the investment
is part of the trade deal signed between China and Russia during state
visits. The deal's preliminary investment agreement was witnessed
by the Russian President, Vladimir Putin, and the Chinese
President, Xi Jinping in June 2016. The Purchase and Sale
agreement was witnessed by the Russian Prime Minister, Dmitry Medvedev,
and China's Premier, Li Keqiang, in November 2016.
The stable outlook on BEHL's rating reflects Moody's expectation
that BEHL will maintain its overall credit profile after the two aforementioned
major overseas investments, and keep further expansions and acquisitions
at a manageable scale.
While Moody's does not see near-term upward momentum for
the ratings of BEHL and BE BVI, BEHL's standalone rating can
be improved if: 1) BEHL successfully deleverages over time;
and/or 2) there are favorable changes in the regulatory environment for
BEHL's core gas and water segments.
The financial metrics for an upgrade could include adjusted funds from
operations/interest above 5x; retained cash flow/debt above 15%;
and/or adjusted debt/book capitalization below 45% for a sustained
basis.
On the other hand, downgrade pressure could arise if: 1) BEHL
pursues further large debt-funded expansions or investments;
and/or 2) there are significant adverse changes to the regulatory regime
which negatively impact BEHL's profitability and cash flow.
The financial indicators that would point to a downgrade of BEHL's issuer
rating include an adjusted funds from operations/interest below 2.5x;
retained cash flow/debt below 8%; and/or adjusted debt/book
capitalization in excess of 60% over a prolonged period.
A material deterioration in the Beijing municipal government's credit
quality, or evidence of weakening support for BE Group, will
also pressure BEHL's issuer rating.
The principal methodology used in these ratings was Investment Holding
Companies and Conglomerates published in December 2015. Please
see the Rating Methodologies page on www.moodys.com for
a copy of this methodology.
The ratings were assigned by evaluating factors that Moody's considers
relevant to the credit profile of BEHL, such as the company's:
(i) overall business risks and individual business segments' competitive
position; (ii) combined capital structure and financial risks;
(iii) projected performance over the near to intermediate term; and
(iv) management's track record and tolerance for risk. Moody's
compared these attributes against other issuers both within and outside
Beijing Enterprises Holdings Ltd.'s core industry and believes
BEHL's ratings are comparable to those of other issuers with similar credit
risk.
Beijing Enterprises Holdings Limited (BEHL) is 61.96% controlled
by Beijing Enterprises Group Company Limited (BE Group, unrated),
which is in turn 100% owned by the Beijing Municipal Government
and supervised by the Beijing State-owned Assets Supervision and
Administration Commission.
BEHL is an investment holding company. It operates three business
segments across China: piped gas operations, brewery operations,
as well as equity investments in sewage and water treatment services.
In 2015, BEHL reported HKD7.1 billion in profit before tax
— excluding corporate expenses — of which, 75%
was from gas-related businesses, 10% from brewery
operations, and 15% from sewage and water treatment services.
Beijing Enterprises Group (BVI) Company Ltd (BE BVI) is an intermediate
offshore holding company, which holds a 56.25% interest
in BEHL. BE BVI is wholly owned by BE Group. BEHL contributed
almost 100% of BE BVI's total operating profit and 96% of
total assets in 2015.
EEW Holdings GmbH operates a portfolio of 18 energy-from-waste
plants in Germany and neighboring countries, with a total waste
treatment volume of approximately 4.4 million tonnes in 2015.
At end-2015, the company reported an unaudited net profit
after tax and extraordinary items of EUR65.6 million, and
consolidated net assets of EUR451.9 million.
Verkhnechonskneftegaz is a 99.94% owned subsidiary of PJSC
Oil Company Rosneft, it holds a license to develop the Verkhnechonsk
oil, gas and condensate field. The current C1+C2 recoverable
reserves of the field stand at 173 mmt of oil and gas condensate and 115
bcm of gas. The current oil production level is 8.5 mmtpa.
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.
Ada Li
Vice President - Senior Analyst
Project & Infrastructure Finance
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
Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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
