Hong Kong, September 30, 2021 -- Moody's Investors Service has placed on review for downgrade the
Baa3 issuer rating of Lanzhou Construction Investment (Holding) Group
Co., Ltd. (Lanzhou Construction), and the Baa3
senior unsecured rating on the bonds issued by City Development Company
of Lan Zhou and guaranteed by Lanzhou Construction. The outlook
is changed to ratings under review from stable.
"The review for downgrade reflects the company's weaker-than-expected
funding access due to the challenging funding environment in the fundamentally
weak regions. As a result, we expect that Lanzhou Construction
will increase its reliance on short-term and high-cost borrowings
to meet its refinancing needs in the next 12 months, which will
weaken its credit profile compared with its Baa3 rated peers,"
says Ying Wang, a Moody's Vice President and Senior Analyst.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
Lanzhou Construction's access to funding has weakened since 2021
due to investors' increased risk aversion towards local government
financing vehicles (LGFVs) in the fundamentally weak regions, driven
by more stringent government measures to contain local governments'
contingent liabilities.
According to the public disclosure, Lanzhou Construction issued
a total of RMB5 billion notes from the onshore bond market in the first
nine months of 2021, of which around 68% of total issuance
was issued at a relatively high cost with tenors less than or equivalent
to one year.
Moody's estimates that at the end of June 2021, Lanzhou Construction
had around RMB16 billion -- RMB17 billion of maturing debt in the
coming 12 months. According to the public disclosure, at
the end of September 2021, around RMB4.9 billion onshore
bonds will mature by the end of 2021. The company plans to utilize
the proceeds from its recent onshore bonds issuance, available cash
balance, undrawn bank facilities, settlement of receivables
from government-related parties, disposal proceeds from operating
assets to meet its refinancing needs.
Moody's also expects the Lanzhou city government will mobilize funds
and resources to support Lanzhou Construction's liquidity needs
given that the latter is the largest provider of essential public services
and the largest owner of key public infrastructure projects in Lanzhou
city.
Nevertheless, Lanzhou Construction's weaker-than-expected
access to funding amid government payment uncertainties due to the relatively
weak economic fundamental in Lanzhou will negatively impact the Lanzhou
city government's propensity to support, and consequently increase
downward pressure on the company's rating.
The company's Baa3 rating is based on the Lanzhou city government's
capacity to support (GCS) score of baa2; and Moody's assessment
of how the company's characteristics affect the Lanzhou city government's
propensity to support, which results in a one-notch downward
adjustment.
Moody's assessment of Lanzhou's GCS reflects Lanzhou city's status
as the provincial capital of Gansu province; and Gansu province's
relatively weak economic and fiscal metrics, and higher risks from
its state-owned enterprise (SOE) sector and its local banking sector
than those of other provinces.
The Baa3 rating also reflects the Lanzhou city government's propensity
to support Lanzhou Construction because of Lanzhou Construction's
100% ownership by the Lanzhou city government, the company's
status as the dominant local government financing vehicle providing essential
public services in the city and its track record of receiving government
cash payments.
However, the one-notch downward adjustment from the Lanzhou
government's GCS score reflects Lanzhou Construction's moderate
exposure to shadow banking and large debt obligation arising from public-policy
projects. Lanzhou Construction's weaker-than-expected
access to funding and its increasing reliance on short-term and
high-cost funding will create more pressure for a further downward
adjustment.
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.
Moody's review will focus on Lanzhou Construction's access to funding
and its ability to refinance its maturing debt with long-term borrowings.
Moody's will also closely monitor the timeliness of government cash
payments to meet the company's funding needs.
Moody's could downgrade the rating if there is no material improvement
in Lanzhou Construction's access to funding, for example,
it still needs to rely on short-term and high-cost borrowings
to refinance its maturing debt.
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 its position as the largest and dominant public
service provider in Lanzhou city; 2) material changes in its core
business with substantial expansion of commercial activities at the cost
of its public service functionalities, or substantial losses in
its commercial activities; 3) rapid increases in its debt and leverage,
with less corresponding government payments.
Because Lanzhou Construction's rating is based on Lanzhou city government's
GCS score, the rating could also be downgraded if (1) China's sovereign
rating is downgraded, or (2) if the Lanzhou city government's capacity
to support weakens, which could be a result of a material worsening
in Lanzhou's economic or financial profile, or in the government's
ability to coordinate timely support. Changes in the Chinese government's
policies that prohibit governments from supporting local government financing
vehicles 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
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 Lanzhou State-owned
Asset Supervision and Administration Commission through a parent intermediary,
Lanzhou Investment (Holding) Group Co., Ltd. The company
mainly engages in urban infrastructure construction, shantytown
redevelopment, utility, 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_1288435.
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
