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Rating Action:

Moody's downgrades Lanzhou Construction to B1; ratings under review

 The document has been translated in other languages

31 Mar 2022

Hong Kong, March 31, 2022 -- Moody's Investors Service has downgraded to B1 from Ba2 the corporate family rating (CFR) of Lanzhou Construction Investment (Holding) Group Co., Ltd. (Lanzhou Construction) and the senior unsecured rating on the bonds issued by City Development Company of Lan Zhou and guaranteed by Lanzhou Construction.

The ratings are under review for further downgrade. At the same time, Moody's has revised the rating outlook of both to rating under review from negative.

"The downgrade reflects Lanzhou Construction's weak debt management and heightened refinancing risks, given the company's tight funding access and substantial amount of debts due in the rest of 2022," says Ying Wang, a Moody's Vice President and Senior Analyst.

The rating review reflects the uncertainties around the company's ability to stabilize its liquidity profile and re-establish its access to funding in next three to six months.

RATINGS RATIONALE

Lanzhou Construction's access to funding remains very limited, given the continued risk aversion among investors toward local government financing vehicles (LGFVs) in less developed regions. In 2021, issuances and net financing from such LGFVs declined in the onshore bond market, despite a record onshore bond issuance by the LGFV sector. It will therefore be challenging for Lanzhou Construction to issue new debt from the onshore bond market. Meanwhile, the company faces sizable maturing debts, including around RMB11.6 billion in bonds that will come due in the rest of 2022.

Consequently, Moody's expects Lanzhou Construction will mainly rely on the Lanzhou city government and Gansu provincial government to mobilize resources, including the Emergency Fund set up at the city-level and provincial-level governments for its debt repayment in the short term.

Moody's believes the Lanzhou city government and the Gansu provincial government have strong incentive to support Lanzhou Construction's liquidity needs, given that the company is the dominant LGFV in Lanzhou city that provides essential public services and develops public infrastructure projects, and one of the largest onshore bond issuers from the province. Nevertheless, there is execution risk associated with timeliness and adequacy of government support.

Moody's also estimates that Lanzhou Construction's debt management is weak, as reflected by the company's concentrated debt maturity in the short term and lack of meaningful progress in addressing its intensifying refinancing pressure and difficulties in access to funding in the past six months.

Lanzhou Construction's B1 rating is based on the Lanzhou city government's GCS score of baa3 and Moody's assessment of how the company's characteristics affect the Lanzhou city government's propensity to support, which results in a four-notch downward adjustment.

Moody's assessment of Lanzhou's GCS reflects Lanzhou city's status as the capital of Gansu province, the city's relatively weak economic and fiscal metrics, the constraints faced by its local financial sector, and the limited disclosure requirements for local SOEs, which prevent a complete assessment of the contingent liability risks that could affect the city's capacity to provide support.

The B1 rating also reflects the Lanzhou city government's propensity to support Lanzhou Construction because of its 100% ownership of the company, the company's status as the dominant LGFV that provides essential public services in the city, and its track record of receiving government cash payments.

However, the four-notch downward adjustment from the Lanzhou government's GCS score reflects Lanzhou Construction's heightened refinancing risks, given its tight funding access, weak debt management and the contingent risk arising from the external guarantees it has provided to other companies.

Lanzhou Construction's rating also considers the following environmental, social and governance (ESG) factors.

The company bears high social risks as it implements public-policy initiatives by building public infrastructure in Lanzhou. Demographic changes, public awareness and social priorities shape the company's development targets and ultimately affect the Lanzhou city government's propensity to support the company.

As for governance considerations, Lanzhou Construction is subject to oversight by the Lanzhou city government and has to meet several reporting requirements, reflecting its public-policy role and status as a government-owned entity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's review will focus on Lanzhou Construction's progress in addressing its mounting debt obligations in the coming months and access to funding, as well as the timeliness of the company receiving government cash payments.

Moody's could downgrade the rating if Lanzhou Construction fails to receive sufficient support from the government or other solid financing arrangements to meet its refinancing needs, or if its access to funding further deteriorates, thereby further weakening its liquidity profile.

The rating could also be downgraded if the Lanzhou city government's propensity to support weakens because of changes in Lanzhou Construction's characteristics, such as (1) a decline in the company's position as the dominant public service provider in Lanzhou city; (2) a substantial expansion of its commercial activities at the cost of its public service functionalities, which changes its core business, or substantial losses by its commercial businesses; or (3) its debt and leverage rapidly increase, with fewer corresponding government payments.

Given that Lanzhou Construction's rating is based on the Lanzhou city government's GCS score, Moody's could downgrade the rating if (1) China's sovereign rating is downgraded, or (2) the Lanzhou city government's capacity to support weakens, which could arise from a material worsening of the city government's economic or financial profile or its ability to coordinate timely support. Changes in the Chinese government's policies that prohibit regional and local governments from supporting their LGFVs will also affect the rating.

An upgrade of the ratings is unlikely, given the review for downgrade. However, Moody's could confirm the rating if Lanzhou Construction alleviates its high liquidity pressure and strengthens its funding access.

The principal methodology used in these ratings was Local Government Financing Vehicles in China Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216254. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 2016, Lanzhou Construction Investment (Holding) Group Co., Ltd. is 100% owned by the Lanzhou State-owned Asset Supervision and Administration Commission through a parent intermediary, Lanzhou Investment (Holdings) Group Co., Ltd. The company mainly engages in urban infrastructure construction, shantytown redevelopment, utilities, public services and transportation in Lanzhou city.

The local market analyst for these ratings is Cindy Yang, +86 (10) 6319-6570.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Ying Wang
Vice President - Senior Analyst
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

No Related Data.
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