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
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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
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
