Hong Kong, September 02, 2022 -- Moody's Investors Service has downgraded to Caa1 from B3 the corporate family rating (CFR) of Lanzhou Construction Investment (Holding) Group Co., Ltd. and the senior unsecured rating on the bonds issued by City Development Company of Lan Zhou and guaranteed by Lanzhou Construction.
The rating outlook remains negative.
"The downgrade reflects Lanzhou Construction's severe liquidity and refinancing risks, given the company's limited fundraising progress to address its large upcoming debt maturities over the next six months, including USD300 million of offshore bonds due in November 2022," says Ying Wang, a Moody's Vice President and Senior Analyst.
The negative outlook reflects Lanzhou Construction's weak debt-repayment ability over the next 6-12 months.
RATINGS RATIONALE
Lanzhou Construction's access to capital markets has been constrained since November 2021, and its negotiation with financial institutions to secure adequate refinancing has been slower than expected. As a result, Moody's believes the company still needs to rely on resources from the Lanzhou city government and Gansu provincial government to repay its public bonds.
At the same time, Lanzhou Construction faces a large amount of bonds coming due or becoming puttable over the next six months, for which the company currently does not have concrete refinancing plans. Uncertainty over whether government support alone can adequately and in a timely manner meet all the company's refinancing needs have further increased as the large debt's maturity date looms.
In addition, Moody's believes Lanzhou Construction's ability to meet its other debt obligations will decline if the company is unable to negotiate refinancing terms with its creditors.
Lanzhou Construction's Caa1 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 seven-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 state-owned enterprises (SOEs), which prevent a complete assessment of the contingent liability risks that affect the city's capacity to provide support.
The Caa1 rating primarily reflects the company's severe liquidity risk. It also reflects the Lanzhou city government's propensity to support Lanzhou Construction, based on its 100% ownership of the company and the company's status as the dominant LGFV providing essential public services in the city. This strength is counterbalanced by 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's liquidity deteriorates further, or if it fails to meet its debt obligations.
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://ratings.moodys.com/api/rmc-documents/386644. Alternatively, please see the Rating Methodologies page on https://ratings.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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Ivan Chung
Associate Managing Director
Corporate Finance Group
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Ada Li
VP - Senior Credit Officer
Corporate Finance Group
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