November 16, 2017 / 9:57 AM / a year ago

Fitch Affirms Guangzhou Metro Group at 'A'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, November 16 (Fitch) Fitch Ratings has affirmed Guangzhou Metro Group Co., Ltd.'s (GZMG) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A' with a Stable Outlook. A full list of rating actions is at the end of this commentary. GZMG's ratings are credit linked to but not equalised with, Fitch's internal assessment of the creditworthiness of Guangzhou Municipality, the capital of Guangdong Province. This is reflected in the municipality's controlling ownership, its strong financial oversight of GZMG, the strategic importance of GZMG's operations, and GZMG's financial integration with the municipality. These factors mean there is a strong likelihood of GZMG receiving extraordinary state support, if needed. Therefore, Fitch classifies it as a credit-linked entity under its criteria "Rating of Public-Sector Entities". KEY RATING DRIVERS Linked to Guangzhou Municipality: Fitch classifies GZMG as an entity credit linked to Guangzhou under its "Rating of Public-Sector Entities - Outside the United States" criteria using a top-down approach. The link reflects strong government oversight and supervision, the high strategic importance of GZMG's public-sector business and strong integration with the provincial budget. Guangzhou's Strong Creditworthiness: Guangzhou is a semi-provincial municipality and the capital city of Guangdong Province. Its gross regional product is the third largest among the 333 prefecture-level municipalities in China. The municipality has a strong fiscal budget, a diversified socioeconomic profile and a strategic location at the heart of the Pearl River Delta area and southern China. Strategic Importance Attribute Assessed as Stronger: GZMG remains the sole metro operator of Guangzhou Municipality, and executes the latter's metro transportation policy. Rail transit has become key to addressing Guangzhou's increasing traffic congestion and to providing a reliable means of commuting for the city's 14 million residents. Fitch therefore believes GZMG will continue to play an important role in the municipality's sustainable development. Control and Supervision Attribute Assessed as Stronger: All board members of GZMG are appointed by the Guangzhou government, and Guangzhou State-owned Assets Supervision and Administration Commission is directly involved in the company's major decisions. The company's financing plans and debt are closely monitored by the government and it regularly reports its operational and financial performance to the government. Integration Attribute Assessed as Stronger: The government has injected significant capital into the company in recent years. GZMG received a capital injection of CNY10 billion in 2016, while the government committed to inject at least CNY10 billion every year to support GZMG's metro development. The company also receives a subsidy from the government (CNY4.2 billion in 2016) to sustain the metro's low-fare policy and ease GZMG's financing cost burden. Legal Status Attribute Assessed at Mid-Range: GZMG is registered as a local state-owned limited liability company under Chinese company law. It is wholly owned and supervised by the Guangzhou municipal government. The notes listed below are issued by Guangzhou Metro Investment Finance (BVI) Ltd., and are unconditionally and irrevocably guaranteed by Guangzhou Metro Investment Finance (HK) Limited (GMHK), a wholly owned subsidiary of GZMG. The notes will be senior unsecured obligations of GMHK and also rank pari passu with all other senior unsecured obligations of GMHK. GZMG has granted, instead of a guarantee, a keepwell and liquidity support deed and a deed of equity interest purchase undertaking to ensure GMHK has sufficient assets and liquidity to meet its obligations under the guarantee. The notes under the MTN programme are rated at the same level as GZMG's IDR, given the strong link between GMHK and GZMG and because the keepwell and liquidity support deed and deed of equity interest purchase undertaking transfer ultimate responsibility for payment to GZMG. In Fitch's opinion, the keepwell and liquidity support deed, and the deed of equity interest purchase undertaking from GZMG signal a strong intention from GZMG to ensure GMHK, guarantor of the notes, has sufficient funds to honour the debt obligations. Fitch also believes GZMG intends to maintain its reputation and credit profile in the international offshore market, and is unlikely to default on its offshore obligations. In addition, a default by GMHK could have significant negative repercussions on GZMG for any future offshore funding. RATING SENSITIVITIES Linkage with Municipality: Stronger or more explicit municipal support may trigger a positive rating action on GZMG. A weakening of GZMG's strategic importance to the municipality, or weakening of the municipal government's controlling shareholding, and/or reduced municipality support could lead to a wider rating gap between GZMG and the Guangzhou Municipality. Creditworthiness of Municipality: A weaker fiscal performance by and/or increased indebtedness of Guangzhou could lead to a lowering of Fitch's internal assessment of Guangzhou Municipality's creditworthiness and therefore may trigger negative rating action on GZMG. Any rating action on GZMG's IDR would result in similar rating actions on the MTN programme and the rated notes under the MTN programme. The full list of rating actions is as follows: Guangzhou Metro Group Co., Ltd. Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'A'; Outlook Stable Guangzhou Metro Investment Finance (BVI) Ltd. USD3bn medium-term note programme affirmed at 'A' USD400m of 2.875% senior unsecured notes due 2018 affirmed at 'A' USD200m of 3.375% senior unsecured noted due 2020 affirmed at 'A' Contact: Primary Analyst Terry Gao Senior Director +852 2263 9972 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Ark Huang Analyst +86 21 5097 3153 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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