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Rating Action:

Moody's upgrades Chengdu Tianfu and Hunan Xiangjiang's ratings following launch of new methodology

 The document has been translated in other languages

30 Jul 2020

Hong Kong, July 30, 2020 -- Moody's Investors Service has upgraded the issuer ratings of Chengdu Tianfu New Area Investment Group Co., Ltd (Chengdu Tianfu) and Hunan Xiangjiang New Area Development Group Co., Ltd (Hunan Xiangjiang) to Baa2 from Baa3, following the publication of its Local Government Financing Vehicles (LGFVs) in China Methodology on 29 July 2020.

Moody's has also upgraded the senior unsecured ratings on the notes issued by Chengdu Tianfu and Hunan Xiangjiang to Baa2 from Baa3.

All rating outlooks remain stable.

At the same time, Moody's has withdrawn the Baseline Credit Assessments (BCAs) previously assigned to these two companies, reflecting the change in primary methodology to LGFVs in China from Government-Related Issuers Methodology.

The upgrades of Chengdu Tianfu and Hunan Xiangjiang reflect (1) Moody's classification of these issuers as LGFVs under the new methodology, and (2) Moody's assessment that these LGFVs should be rated closer to the "Government Capacity to Support" (GCS) score of their respective RLG owners, given their strategic roles and dominant position in providing essential public policy services in China's "New Areas" on behalf of their government owners.

RATINGS RATIONALE

Chengdu Tianfu's Baa2 ratings are based on (1) the Chengdu government's GCS score of a3; and (2) Moody's assessment of how the company's characteristics affect the Chengdu government's propensity to support, resulting in a two-notch downward adjustment.

The assessment considers Chengdu Tianfu's role as the dominant public service provider in the Tianfu New Area, as well as its 100% ultimate ownership by the Chengdu government. Chengdu Tianfu is different from other LGFVs owned by the Chengdu government because of its strategic role and public policy mandates in the Tianfu New Area, and the fact that Tianfu New Area is one of the 19 national level "New Areas" approved by the State Council with a track record of robust development. As a result, Chengdu Tianfu's rating is one notch closer to the Chengdu government's GCS compared with its rated peers.

Hunan Xiangjiang's Baa2 ratings are based on (1) the Changsha government's GCS score of a3; and (2) Moody's assessment of how the company's characteristics affect the Changsha government's propensity to support, reflecting in a two-notch downward adjustment.

The assessment considers Hunan Xiangjiang's role as the dominant public service provider in the Xiangjiang New Area, as well as its 100% ultimate ownership by the Changsha government. Hunan Xiangjiang is different from other LGFVs owned by the Changsha government because of its strategic role and public policy mandates in the Xiangjiang New Area, and the fact that the Xiangjiang New Area is one of the 19 national level "New Areas" approved by the State Council with a track record of robust development. As a result, Hunan Xiangjiang's rating is one notch closer to the Changsha government's GCS compared with its rated peers.

The change in the primary methodology reflects the publication of Moody's new LGFVs in China methodology and Moody's view that (1) RLG support is the dominant credit consideration for an LGFV; and (2) LGFV-specific characteristics may also affect the RLG's propensity to support LGFVs.

LGFVs are entities that are directly or indirectly fully owned and effectively controlled by RLGs. They primarily engage in financing, investing in and operating public infrastructure and social welfare projects on behalf of their RLG owners.

Because the primary purpose of LGFVs is to serve public policy objectives and provide public goods or services for free or at subsidized rates, they are typically closely integrated with their RLG owners, and RLGs typically provide the majority of LGFVs' cash flow.

The analytical framework in this rating methodology comprises two components:

1) The "Governmental Capacity to Support" (GCS) component, which considers aspects that could influence an RLG-owner's ability to provide support to an LGFV in a timely manner; and

2) The "LGFV Characteristics Affecting Support" component, primarily based on (1) an LGFV's business profile; (2) its integration with the RLG as well as the control and oversight provided by the RLG; (3) the risk that the LGFV will need to bail out other entities; and (4) any exceptional governmental willingness to support characteristics, and other analytical considerations. This analysis may result in downward or, more rarely, upward adjustments in whole notch increments to the GCS score.

The ratings also consider the following environmental, social and governance (ESG) factors.

Environmental risks are low for both issuers.

LGFVs generally have high social risks since they implement public policy initiatives by building, owning and operating public infrastructure. Demographic changes, public awareness and social priorities shape their development targets and ultimately affect their respective owner RLGs' propensity to provide support. Both issuers are exposed to a high degree of social risk since they implement public policy initiatives by building, owning and operating public infrastructure.

Governance considerations are also material to the ratings, as the issuers are subject to oversight and reporting requirements to its owner RLG, reflecting their public policy role and status as a government owned entity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlooks for Chengdu Tianfu and Hunan Xiangjiang reflect (1) the stable outlook on the China's A1 sovereign rating; (2) Moody's expectation that their respective RLG owners' GCS will remain stable, and (3) their business profiles and integration with their RLG owners, and Moody's view that the control and oversight provided by their respective owners will remain largely unchanged over the next 12-18 months.

Moody's has recalibrated the rating tolerance levels of these LGFVs to reflect the change in methodology and corresponding credit drivers.

Chengdu Tianfu's and Hunan Xiangjiang's ratings could be upgraded if

(1) China's sovereign rating is upgraded or their respective cities' GCS strengthens, which could be the result of a material strengthening in the city's economic or financial profile, or their ability to coordinate timely support; or

(2) Their characteristics change in a way that strengthens their RLG owners' propensity to support, such as through the issuers becoming more strategically important to their respective city governments; or through an increase in government payments and an improvement in the predictability of government payment mechanisms, whereby dedicated fiscal budget allocations and transfers from higher-tier governments can consistently cover a large share of their operational and debt servicing needs.

On the other hand, the ratings could be downgraded if

(1) China's sovereign rating is downgraded or their respective governments' GCS weakens, which could be the result of a material weakening in the city's economic or financial profile, or their ability to coordinate timely support;

(2) There are changes in the Chinese government's policies that prohibit RLGs from providing financial support to LGFVs; or

(3) Their characteristics change in a way that weakens their RLG owners propensity to support, such as through:

• Material changes in their businesses, including substantial expansions into commercial activities at the cost of public services, and/or substantial losses in commercial activities;

• A decline in their position as the largest and dominant public service providers in their respective areas; or

• Rapid increases in their debt and leverage with less corresponding government payments.

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.

Chengdu Tianfu New Area Investment Group Co., Ltd is 100%-owned by the Management Committee of the Chengdu Region of the Tianfu New Area, Sichuan Province. It is also directly supervised by the Chengdu City government. It is the only entity that is mandated by the government to develop the Tianfu-Chengdu Region. The company is primarily in charge of urban infrastructure construction and the development of properties in the Tianfu-Chengdu Region. At the end of 2019, Chengdu Tianfu reported total assets of RMB113 billion.

Hunan Xiangjiang New Area Development Group Co., Ltd is 100% directly owned by the Changsha Government. It is a key company involved in the development of the Xiangjiang New Area in Changsha, Hunan Province. The company mainly engages in the primary land development and construction of infrastructure projects in the Xiangjiang New Area. Its assets totaled RMB72 billion at the end of 2019.

The local market analyst for Chengdu Tianfu New Area Investment Group Co., Ltd's ratings is Sue Su, +86 (106) 319-6505. The local market analyst for Hunan Xiangjiang New Area Development Group Co., Ltd's ratings is Yan Li, +86 (106) 319-6572.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

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.

Chenyi Lu
VP - Senior Credit Officer
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

No Related Data.
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