October 11, 2017 / 8:27 AM / a year ago

Fitch Affirms Huai An Traffic at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, October 11 (Fitch) Fitch Ratings has affirmed China-based Huai An Traffic Holding Co., Ltd's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB+'. The Outlook is Stable. Fitch has also affirmed the company's USD300 million 4.95% notes due 2019 at 'BB+'. The bonds are issued directly by Huai An Traffic and are rated at the same level as its IDR. The bonds constitute the company's direct, unconditional, unsubordinated and unsecured obligations and rank pari passu with all its other senior unsecured obligations. KEY RATING DRIVERS Links to Huai'an Municipality: Huai An Traffic's ratings are linked to, but not equalised with, Fitch's internal assessment of Huai'an municipality. This is reflected in the company's full government ownership, strong government control and oversight and, to a lesser extent, the strategic importance of the entity's operation to the municipality. These factors result in a high likelihood of extraordinary support, if needed, from the municipality. Therefore, Huai An Traffic is classified as a credit-linked public-sector entity under Fitch's criteria. Huai'an Municipality's Healthy Creditworthiness: Huai'an, located in Jiangsu province, has a satisfactory budget performance and a diversified socio-economic profile. Huai'an's gross regional product growth rate is higher than the national average and its budgetary performance improved over the previous decade. These strengths are partly offset by potentially high contingent liabilities arising from the municipality's public-sector entities. Legal Status Attribute Midrange: Huai An Traffic is a 100% registered municipal State-Owned Assets Supervision and Administration Commission (SASAC)-owned limited liability company under China's company law. The legal status is moderate because, according to company law, the company can be liquidated or made bankrupt and employees are not civil servants. Under its legal status, major decisions - such as M&A, spin-offs, bankruptcy and liquidation - require verification and approval from the municipal government. According to Huai'an SASAC, the government had no plans to dilute its shareholding in Huai An Traffic as of September 2017. Strategic Importance Attribute Midrange: Huai An Traffic is designated by Huai'an municipality as a major investment and financing platform for transportation-related infrastructure in Huai'an. Its major activities include developing, financing, operating and managing toll roads, airports and ship locks and its business is diversified to include construction, trading, logistics, shipping, catering and tourism. The commercialised parts of the business could undermine Huai An Traffic's strategic importance. Weak Government Integration: The government has supported Huai An Traffic via asset transfers. For example, it injected CNY12.9 billion of assets in 2016. However, transfers and grants/total revenue shows a declining trend to 14% in 2016 from 19% in 2015. Fitch expects the declining ratio to continue in the medium term. Asset purchases from government also help fund Huai An Traffic's operations and capital spending for transportation-related infrastructure development. However, delayed settlement has impaired cash flow generation. Sponsor Control Attribute Stronger: The Huai'an municipal government sets the course of Huai An Traffic's strategic development, appointing most of its senior management and signing off on its major decisions. The company's financing plans and debt levels are also closely monitored by the municipality. In addition, Huai An Traffic is required to regularly report its operational and financial results to the municipality, according to the company. Weak Financial Profile: The company has high leverage due to its large capex requirements. Its debt/Fitch-calculated EBITDA reached more than 40x in 2016, from around 20x in 2015. Fitch expects the ratio to stabilise below 30x in the medium term as Huai An Traffic's debt increases at a more controlled pace along with rising revenue and EBITDA. Interest coverage remains weak, with negative FFO during 2014-2016. We expect FFO to remain negative in the medium term. An extended settlement period for purchased assets increased account receivables due from the government in 2016, constraining cash flow generation. RATING SENSITIVITIES An upgrade of Fitch's internal assessment of Huai'an municipality would lead to positive rating action on Huai An Traffic. A stronger or more explicit commitment of support from the municipality may also trigger positive rating action. A significant weakening in the company's strategic importance to the municipality, dilution of the municipal government's shareholding or reduced municipal support may result in a downgrade. A downgrade may also stem from weaker fiscal performance or increased indebtedness of the municipality, leading to deterioration of Fitch's assessment of is creditworthiness. Rating action on Huai An Traffic would lead to similar action on the rating of its US dollar notes. Contact: Primary Analyst Janet Liu Associate Director +852 2263 9983 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Ethan Lee Associate Director +852 2263 9912 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com 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. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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