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Rating Action:

Moody's revises outlook on Yuexiu Transport to stable; affirms Baa2 ratings

 The document has been translated in other languages

20 Jul 2016

Hong Kong, July 20, 2016 -- Moody's Investors Service has changed the outlook to stable from negative on Yuexiu Transport Infrastructure Limited's Baa2 issuer rating.

At the same time, Moody's has affirmed the Baa2 issuer rating of Yuexiu Transport, the Baa2 rating on the backed senior unsecured notes, and the provisional (P)Baa2 senior unsecured rating on the backed medium term note (MTN) program of Famous Kind International Limited.

All ratings outlook is stable.

RATINGS RATIONALE

"The change in outlook to stable reflects the strengthening in Yuexiu Transport's credit profile, supported by its steady and fairly resilient operating performance," says Ivy Poon, a Moody's Assistant Vice President and Analyst.

"The change in outlook to stable also considers Yuexiu Transport's track record of debt reduction, with the exception of 2015 when it acquired Suiyuenan Expressway to augment its portfolio of roads, and which it partly debt-funded," Poon adds.

Furthermore, the change in outlook to stable reflects Moody's view that Yuexiu Transport will continue to be managed prudently with stable dividend payouts, consistent with its track record, and notwithstanding the lower credit quality of its parent, Guangzhou Yuexiu Holdings Limited (Yuexiu Group, unrated).

Yuexiu Transport has shown a steady operating performance, as its diversified toll portfolio tempers the impact of the slowdown in industrial activity. Its increased efforts to improve its cost structure and reduce its financing costs have also helped the company broadly maintain its profitability, despite the heavy maintenance last year.

Moody's expects the company's credit metrics will improve moderately in 2016-18, such that its funds from operations (FFO)/debt will strengthen to 18%-20% and its debt service coverage ratio to 2.8x in the next two years, from 16% and 2.5x in 2015.

"The company currently has a material amount of secured debt (around 24% of total assets at end-2015) that ranks ahead of the senior unsecured creditors, thereby giving rise to legal subordination issues," says Poon.

"But we did not notch down the senior unsecured rating, because we expect the company to progressively refinance its secured debt with unsecured debt, such that the ratio of senior secured debt to total assets will decline to below 20% by end-2016 and further to close to 15% by end-2017," adds Poon.

The credit profile of Yuexiu Transport's parent company -- Yuexiu Group -- has weakened in recent years due to increasing leverage from its property business, the provision of financial support to its banking business, as well as increased debt at Yuexiu Transport.

The resultant risks for Yuexiu Transport are somewhat mitigated by its listed status and the absence of excessive cash leakages to the parent in the past. Its historical dividend payout ratio -- after excluding one-off items from net profit -- has been fairly stable at an average of 60%. Yuexiu Transport also has not been required to advance intercompany loans to the parent in the past.

Moody's will continue to monitor Yuexiu Group's credit quality. Any material deterioration in Yuexiu Group's credit profile or evidence of excessive cash leakages from Yuexiu Transport to the parent will trigger a rating review.

The stable outlook reflects Moody's expectation that the company's toll road portfolio will continue to generate steady cash flows, with no debt-funded acquisitions in the next 18 months.

Upward rating pressure is limited in the near term, given the recent change in outlook to stable from negative. Nevertheless, upward rating pressure could emerge over time if: (1) FFO/debt rises above 20%; and (2) there is a track record of positive free cash flow generation.

On the other hand, the rating could be downgraded if Yuexiu Transport: (1) engages in aggressive debt-funded expansion; (2) experiences adverse material changes in its operating environment, which in turn impair its traffic volumes and toll revenues; or (3) there is evidence of excessive cash leakages from Yuexiu Transport to its parent company or the group's subsidiaries. Furthermore, the ratings could be downgraded if the company does not reduce the ratio of secured debt to total assets to below 20% by end of 2016.

Financial indicators for a possible downgrade include FFO/debt below 12.5% on a prolonged basis or priority debt to total assets in excess of 15%-20% beyond December 2016.

The principal methodology used in these ratings was Privately Managed Toll Roads published in May 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Yuexiu Transport Infrastructure Limited invests in and operates toll expressways and bridges, mainly in Guangdong Province and central and western China. At end-2015, its operating expressway and bridge projects had an attributable length of about 378.5 km.

Yuexiu Transport was listed on the Hong Kong Exchange in 1997. Guangzhou Yuexiu Holdings Limited (Yuexiu Group) is the ultimate controlling company with a 60.65% stake. Yuexiu Group is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Government.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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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.

Ivy Poon
Asst Vice President - Analyst
Project & Infrastructure Finance
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
SUBSCRIBERS: (852) 3551-3077

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

No Related Data.
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