Hong Kong, July 30, 2020 -- Moody's Investors Service has upgraded the ratings of Shuifa Group
Co., Ltd., Jiangxi Provincial Water Conservancy
Invt Grp and their rated subsidiaries under various regional and local
governments (RLGs) in China (A1 stable). Moody's has also
assigned a Baa3 issuer rating to Zhuzhou City Construction Dev.
Group Co Ltd, and withdrawn its Ba1 corporate family rating.
These actions follow the publication of its Local Government Financing
Vehicles (LGFVs) in China Methodology on 29 July 2020.
Specifically, Moody's has:
- Upgraded Shuifa Group Co., Ltd.'s (Shuifa)
issuer rating to Baa1 from Baa3, and the senior unsecured rating
on the bonds issued by Shuifa International Holdings (BVI) Co.,
Ltd and guaranteed by Shuifa to Baa1 from Baa3.
- Upgraded Jiangxi Provincial Water Conservancy Invt Grp's
(Jiangxi Water) issuer ratings to Baa2 from Baa3, and the senior
unsecured rating on the bond issued by Jiangxi Provincial Water Conservancy
(China) and guaranteed by Jiangxi Water to Baa2 from Baa3.
- Assigned a Baa3 issuer rating to Zhuzhou City Construction Dev.
Group Co Ltd (ZCCD), and withdrawn its Ba1 corporate family rating.
At the same time, Moody's has withdrawn the Baseline Credit Assessments
(BCAs) previously assigned to Shuifa, Jiangxi Water and ZCCD,
reflecting the change in methodology to the LGFVs in China from Government-Related
Issuers Methodology.
All the rating outlooks remain stable.
The rating actions 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 their respective service areas on behalf of their government
owners.
RATINGS RATIONALE
Shuifa's Baa1 issuer rating is based on (1) Shandong provincial
government's GCS score of a1; (2) Moody's assessment
of how the company's characteristics affect the Shandong provincial
government's propensity to provide support, which results
in a three-notch downward adjustment.
The assessment considers Shuifa's status as the sole provincial
water utility and conservancy entity and close government links,
and high strategic importance to the Shandong and Chinese governments.
However, the company's rating is constrained by the elevated risks
associated with its non-water utilities and businesses outside
Shandong province, and the reduced certainty around government payments
although the support track record has been good.
Jiangxi Water's Baa2 issuer rating is based on (1) Jiangxi provincial
government's GCS score of a2; (2) Moody's assessment
of how the company's specific characteristics affect the Jiangxi
provincial government's propensity to provide support, which
results in a three-notch downward adjustment.
The assessment considers Jiangxi Water's status as the sole provincial
water utility and conservancy entity and close government links,
and its high strategic importance to the Jiangxi and Chinese governments,
with a track record of government support. Nevertheless,
the company's rating is constrained by the company's operating challenges
and the less predictable financial support from the provincial government.
The Baa2 rating also considers the uncertainty associated with Jiangxi
Water's acquisition of water supply plants within the provinces,
and in particular the uncertainty around the credit quality of target
and timing of the acquisition.
ZCCD's Baa3 issuer rating is based on (1) Zhuzhou government's
GCS score of baa2; (2) Moody's assessment of how the company's
specific characteristics affect the Zhuzhou city government's propensity
to support, which results in a one-notch downward adjustment.
The assessment considers ZCCD's status as the city's largest
LGFV that provides essential public services and infrastructure development,
its low exposure to non-public service activities, its close
integration with the Zhuzhou government, and the track record of
government support.
The change in the primary methodology reflects the launch 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 and the control and oversight provided by the
RLG; (3) the risk that the LGFV will need to bail out other entities;
(4) any exceptional governmental propensity 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.
Under the new methodology, the three issuers' credit profile
are closely related to the strong expected government support, considering
their (1) dominant business positions in their RLGs' regions;
(2) high strategic importance in providing essential water utility and
infrastructure services; and (3) close integration with and the control
exercised by their RLG owners.
The ratings also consider the following environmental, social and
governance (ESG) factors.
Activities undertaken by LGFVs may carry varying levels of environmental
risks depending on the mandate of individual LGFVs. Water utilities
face moderate environmental risks as they are exposed to droughts,
flooding and pollution. On the other hand, the essentiality
of water utility infrastructure enhances these companies' strategic
importance to their owner RLGs and improves the RLG's propensity
to provide support.
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.
Governance considerations are also material to the ratings, as the
issuer is subject to oversight and reporting requirements to its owner
RLG, reflecting its 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 Shuifa, Jiangxi Water and ZCCD reflect (1)
the stable outlook on China's A1 sovereign ratings; (2) Moody's
expectation that their respective RLG owner's GCS will remain stable;
and (3) Moody's expectation that the LGFVs' business profiles
and integration with, and the control and oversight exercised by
their respective RLG owners will remain largely unchanged over the next
12-18 months.
Moody's has recalibrated the rating tolerance levels of these three LGFVs
to reflect the change in methodology and corresponding credit drivers.
Their ratings could be upgraded if (1) China's sovereign rating
is upgraded or the LGFVs' respective owner RLGs' GCS strengthens,
which could be the result of a material strengthening in the owner RLGs'
economic or financial profile, or their ability to coordinate timely
support; or (2) the LGFVs' specific characteristics change
in a way that enhances the RLGs' propensity to support them.
Shuifa's rating could also be upgraded if there are changes to its
specific characteristics that enhance the Shandong provincial government's
propensity to provide support, for example: (1) if it reduces
its exposure to non-water related commercial activities; (2)
if it adopts a less aggressive financial policy, especially in terms
of its expansion outside its water conservancy and utilities mandate;
or (3) there are positive improvements in the government support mechanism
for Shuifa's water conservancy and water utilities projects.
Jiangxi Water's rating could also be upgraded if there are changes to
its specific characteristics that enhance the Jiangxi provincial government's
propensity to provide support, for example: (1) if there is
a material improvement in the visibility of recurring government support,
including the provision of grants and subsidies; or (2) established
track record to manage execution risks arise from acquisition of water
supply projects.
On the other hand, the three LGFVs' ratings could be downgraded
if (1) China's sovereign rating is downgraded or the RLG owners'
GCS weakens, which could be the result of a material weakening in
the RLG owners' economic or financial profile, or their ability
to coordinate timely support; (2) the LGFVs' specific characteristics
change in a way that lowers the RLGs' propensity to provide support;
or (3) there are changes in Chinese government policies that prohibit
RLGs from providing financial support to LGFVs.
Shuifa's rating could also be downgraded if there are changes to
its specific characteristics that lower the Shandong provincial government's
propensity to provide support, for example: (1) if there are
material adverse changes in the ongoing government support mechanism that
weakens the adequacy and timeliness of government payment on a sustained
basis; (2) in case of a material weakening in Shuifa's policy
functions; or (3) if the company further engages in high-risk,
or competitive businesses outside its role as provider of water utilities
and water conservancy services for Shandong Province.
Jiangxi Water's rating also could be downgraded if there are changes
to its specific characteristics that lower the Jiangxi provincial government's
propensity to provide support, for example: (1) if government
grants for water conservancy project substantially decline, reflecting
a weakening in government support; (2) Jiangxi Water engages in riskier
commercial businesses, and (3) there is a material weakening in
Jiangxi Water's market position and policy functions.
ZCCD's ratings could also be downgraded if there are changes to
its specific characteristics that lower the Zhuzhou government's
propensity to provide support, for example: (1) if there are
material adverse changes in the ongoing government support mechanism that
weaken the adequacy and timeliness of government payment on a sustained
basis; (2) if there is a material weakening in ZCCD's policy
functions; (3) if the company further engages in high-risk,
or competitive businesses outside its core role; (4) if ZCCD loses
its status as the largest and dominant public service provider for Zhuzhou.
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.
The local market analyst for Zhuzhou City Construction Development Group
Co., Ltd.'s ratings is Qingqing Guo, +86
(212) 057-4093.
List of Affected Credit Ratings
..Issuer: Jiangxi Provincial Water Conservancy (China)
(Lead Analyst: Ralph Ng)
....Long-term Senior Unsecured Debt
(Foreign Currency), Upgraded to Baa2 from Baa3
....Outlook, Maintained at Stable
..Issuer: Jiangxi Provincial Water Conservancy Investment
Group Corp (Lead Analyst: Ralph Ng)
.... Long-term Issuer Rating (Foreign
and Local Currency), Upgraded to Baa2 from Baa3
....Outlook, Maintained at Stable
..Issuer: Shuifa Group Co., Ltd.
(Lead Analyst: Ada Li)
.... Long-term Issuer Rating (Foreign
Currency), Upgraded to Baa1 from Baa3
....Outlook, Maintained at Stable
..Issuer: Shuifa International Holdings (BVI) Co.,
Ltd (Lead Analyst: Ada Li)
....Long-term Senior Unsecured Debt
(Local Currency), Upgraded to Baa1 from Baa3
....Outlook, Maintained at Stable
..Issuer: Zhuzhou City Construction Development Group
Co., Ltd. (Lead Analyst: Ralph Ng)
.... Long-term Issuer Rating (Foreign
Currency), Assigned Baa3
.... Corporate Family Rating, Withdrawn
, Previously rated Ba1
....Outlook, Maintained at Stable
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
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issued on a support provider, this announcement provides certain
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The first name below is the lead rating analyst for this Credit Rating
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Ada Li
VP - Senior Credit Officer
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
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Terry Fanous
MD-Public Proj & Infstr Fin
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