Hong Kong, May 20, 2022 -- Moody's Investors Service has downgraded to B3 from B1 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.
At the same time, Moody's has changed the ratings outlook to negative from ratings under review.
This rating action concludes the review for downgrade initiated on 31 March 2022.
"The downgrade reflects Lanzhou Construction's lack of material progress in resolving its large upcoming debt maturities in the second half of 2022 during the review period. Given its limited access to funding, the heightened liquidity and refinancing risks weaken the company's credit quality to the B3 rating level," says Ying Wang, a Moody's Vice President and Senior Analyst.
The negative outlook reflects the uncertainties over the company's ability to raise new funding to address its refinancing needs and maintain a sufficient liquidity buffer over the next 6-12 months.
RATINGS RATIONALE
Lanzhou Construction has sizable debts, including RMB9 billion in onshore bonds and USD300 million in offshore bonds, maturing or becoming puttable by the end of 2022. At the same time the company's access to funding remains very limited because of continued investor's risk aversion toward local government financing vehicles (LGFVs) from fundamentally weak regions. Given the company's slower-than-expected progress in disposing its assets and its negotiation with financial institutions to secure adequate refinancing, the company's escalating liquidity stress is the key factor underscoring its B3 CFR.
Moody's expects Lanzhou Construction will mainly rely on the Lanzhou city government and Gansu provincial government to mobilize resources and negotiate with financial institutions for its debt repayment before the company's access to the capital market resumes. The company relied on support measures from the city and provincial governments, for example, emergency funds set up by the governments to provide liquidity support to state-owned enterprises (SOEs), as well as coordination with financial institutions to repay its debt over the past six months. However, given Lanzhou Construction's increasing maturities, it is uncertain whether the company can rely on government support alone to adequately meet all its refinancing needs for the next 6-12 months in a timely manner.
Lanzhou Construction's B3 rating incorporates the Lanzhou city government's capacity to support (GCS) score of baa3 and Moody's assessment of the company's liquidity risk and how its characteristics affect the Lanzhou city government's propensity to support, which results in a six-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 affect the city's capacity to provide support.
The B3 rating primarily reflects the company's severe liquidity risk in next 6–12 months. It also reflects the Lanzhou city government's propensity to support Lanzhou Construction, based on its 100% ownership of the company, the company's status as the dominant LGFV that provides essential public services in the city, the company's weak debt management, and the contingent risks 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 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.
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) a rapid increase in its debt and leverage, 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 negative outlook. However, Moody's could revise the outlook to stable 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 April 2022 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1321524. 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
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Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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JOURNALISTS: 852 3758 1350
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