Hong Kong, September 16, 2022 -- Moody's Investors Service ("Moody's") has downgraded to Ba2 from Ba1 the corporate family rating (CFR) of Yinchuan Tonglian Capital Investment Operation Co., Ltd. (Yinchuan Tonglian).
Moody's has also changed the rating outlook to negative from stable.
"The downgrade reflects the company's constrained access to funding with large upcoming debt maturities over the next 12 months, as well as reduced government cash payments. As such, Yinchuan Tonglian's overall credit profile is more in line with that of its Ba2 rated local government financing vehicle (LGFV) peers," says Roy Zhang, a Moody's Vice President and Senior Analyst.
"The negative outlook reflects the uncertainty around regional funding conditions and the company's ability to strengthen its funding access over the next 12 months," added Zhang, also Moody's Lead Analyst for Yinchuan Tonglian.
RATINGS RATIONALE
The downgrade reflects tightened credit conditions of LGFVs in northwestern China. Yinchuan Tonglian's access to funding remains constrained in 2022. The company only issued one onshore bond with credit enhancement from a guarantee company in the first eight months of 2022. In the first half (1H) of 2022, the company continued to record a net funding outflow in financing activities, and its cash balance further decreased to RMB435 million as of the end of June 2022 from RMB890 million as of the end of 2021.
At the same time, Yinchuan Tonglian's government cash support has been declining. Moody's does not expect a material increase in government cash support over the next 12 months given the challenging macro-economic situation. Yinchuan Tonglian receives government cash payments from the Yinchuan city government in the form of operating subsidies, cash injections, government funds allocation and government buyback of infrastructure projects. Yinchuan Tonglian received total government cash support of around RMB1.1 billion in 2021, as compared with around RMB2.6 billion in 2018.
Nevertheless, Moody's believes the Yinchuan government will mobilize resources to support the company's liquidity needs, given that the company is the largest state-owed enterprise (SOE) in Yinchuan city that provides essential public services and develops public infrastructure projects. Yinchuan Tonglian's CFR incorporates Moody's expectation that the Yinchuan government has adequate resources that it can mobilize to underpin the company's rating at the Ba level.
The negative outlook considers the uncertainty around the refinancing of debt maturing within the next 12 months, amid the Yinchuan government's efforts to monitor and facilitate the company's refinancing. Potential government support measures include injections of state-owned assets from the government, facilitating coordination with financial institutions, and emergency funds set up by the government to provide liquidity support.
However, due to tightening credit markets and weak credit sentiment in the region, it remains unclear if the measures can adequately improve Yinchuan Tonglian's ability to refinance its maturing debts with long-term bank loans or bonds. Moody's estimates Yinchuan Tonglian has RMB6.3 billion bonds coming due or becoming puttable over the next 12 months, including USD300 million notes due in June 2023.
Yinchuan Tonglian's Ba2 rating is based on the Yinchuan government's capacity to support (GCS) score of baa1; and Moody's assessment of how the company's characteristics affect the Yinchuan government's propensity to support, which results in a four-notch downward adjustment.
Moody's assessment of Yinchuan government's GCS reflects Yinchuan's status as the capital of Ningxia Hui Autonomous Region, a moderate-risk province in the western region of China (A1 stable), and the city's sound fiscal profile and lower contingent liabilities, balanced against weaker economic fundamentals, including a smaller economy compared with the capital cities of more developed regions.
The Ba2 rating also reflects the Yinchuan government's propensity to support Yinchuan Tonglian because of its 100% ownership of the company and the status of Yinchuan Tonglian as the largest SOE that provides essential public services in the city, including gas supply and public transportation.
However, the four-notch downward adjustment from the Yinchuan government's GCS score reflects Yinchuan Tonglian's weak funding access and government cash payments, medium exposure to commercial activities and contingent risk.
Yinchuan Tonglian'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 Yinchuan. Demographic changes, public awareness and social priorities shape the company's development targets and ultimately affect the Yinchuan government's propensity to support the company.
As for governance considerations, Yinchuan Tonglian is subject to oversight by the Yinchuan 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 RATING
Moody's could downgrade the rating if (1) China's sovereign rating is downgraded or Yinchuan government's GCS weakens, which could arise from a significant weakening in Yinchuan city's economic or financial profile or its ability to coordinate timely support; (2) changes in Chinese government's policies prohibit regional and local governments (RLGs) from providing financial support to LGFVs; or (3) the company's characteristics change in a way that weakens the Yinchuan government's propensity to support, such as:
- Its access to funding further deteriorates;
- A weakening in its position as the largest and dominant public service provider in Yinchuan city;
- Its core businesses undergo material changes, including a substantial expansion into commercial activities that results in significant losses or at the cost of public services;
- Its debt and leverage rapidly increase without a corresponding rise in government payments, leaving the company reliant on high-cost financing, including through non-standard channels; or
- It significantly increases loans, guarantees or other credit exposures to external parties from current levels.
An upgrade of the ratings is unlikely, given the negative outlook. However, Moody's could revise the outlook to stable if Yinchuan Tonglian strengthens its funding access and its liquidity profile. For example, if the company raises funds from the bond market at a reasonable cost with a long-term tenor.
The principal methodology used in this rating 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.
Founded in 2008, Yinchuan Tonglian Capital Investment Operation Co., Ltd. is 100% owned by the Yinchuan government. The company is the largest SOE in Yinchuan city, and engages in various businesses, including municipal infrastructure projects construction, public transportation and gas supply in Yinchuan city.
The local market analyst for this rating 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.
Roy Zhang
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
Ivan Chung
Associate Managing Director
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
