June 19, 2017 / 9:41 AM / a year ago

Fitch Affirms Tianjin Binhai New Area Construction and Investment at 'A-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, June 19 (Fitch) Fitch Ratings has affirmed Tianjin Binhai New Area Construction and Investment Group Co., Ltd.'s (BHCIG) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed the 'A-' long-term foreign-currency ratings of the following notes issued by Zhaohai Investment (BVI) Limited: USD300 million 3.1% senior unsecured notes due 2018 USD500 million 4.0% senior unsecured notes due 2020 The notes are unconditionally and irrevocably guaranteed by Binhai Jiantou (Hong Kong) Development Limited (BJHK), BHCIG's wholly owned subsidiary. Under the keepwell structure, BHCIG will undertake to ensure BJHK has sufficient assets and liquidity to meet its obligations. BHCIG commenced a consent solicitation for the two notes on 26 May 2017; the company will replace the keepwell structure by a direct guarantee from the parent in lieu of waving a technical breach of its financial covenant. Fitch will monitor the progress of the consent solicitation process. According to the solicitation, early voting will expire on 20 June 2017 and the final results will be announced on 30 June 2017. Fitch has affirmed BHCIG's IDRs and the senior debt ratings because linkages with Tianjin, a municipality about 170 kilometres south-east of Beijing, remain unchanged. BHCIG's 100% municipality ownership, the city's supervision of its financials and the strategic importance of the company's public-sector business to the city suggest a high likelihood of BHCIG receiving extraordinary support, if needed. KEY RATING DRIVERS Consent Solicitation: BHCIG announced a consent solicitation on 26 May 2017 for the two senior unsecured notes in which the company will replace the keepwell structure by a direct guarantee from the parent in lieu of waving a technical breach of its financial covenant. The covenant was triggered by exchange-rate volatility rather than by liquidity issues. Fitch believes the consent solicitation is likely to be accepted, as a direct-guarantee structure should provide more protection for bondholders. BHCIG should have sufficient liquidity in the unlikely event that it fails to obtain the consent and faces an accelerated bond repayment schedule. Links to Tianjin Municipality: BHCIG's ratings are closely credit-linked to, but not equalised with, Tianjin municipality. Fitch's view is based on BHCIG's 100% government ownership and the strong municipal oversight of its financials, as well as the strategic importance of the entity's operation to Tianjin. These factors mean there is a strong likelihood of BHCIG receiving extraordinary state support, if needed. Tianjin's Creditworthiness: Tianjin is a provincial-level city and a key logistics hub in northern China. Tianjin has benefited from increasing integration of the Jing-Jin-Ji economic zone with the city of Beijing and Hebei province resulting from central government initiatives. Tianjin also has a favourable socio-economic profile, with the highest GDP per capita among provincial-level cities, as well as a stable budgetary performance. These strengths mitigate Tianjin's moderately high contingent liabilities arising from its state-owned entities. Legal Status 'Mid-Range': BHCIG was established in 2008 as a wholly state-owned limited liability company. Under this legal status, the company's major decisions require government verification and approval. The government has no plans to dilute its BHCIG shareholding. Fitch assesses BHCIG's legal status attribute as mid-range. Control 'Stronger': The company's board is appointed by Tianjin and Binhai New Area authorities and the board's major projects require government approval. Moreover, the municipality closely monitors BHCIG's financing plan and debt level and the company needs to regularly report its operational and financial results to the government. Fitch has given this attribute more weight in the rating. Strategic Importance 'Mid-Range': BHCIG is Binhai New Area's major infrastructure project construction company and the operator of key public services. BHCIG's geographical concentration and asset size rank third out of Tianjin's local government funding vehicles (LGFV) and were the main factors behind our rating. BHCIG is a flagship LGFV with a dominant position in the state-level new area, which accounted for 56% of Tianjin's total gross regional product in 2016. A default could have negative political consequences and a large effect on Tianjin's economic growth considering the strategic importance of the new area. Government Integration 'Mid-Range': BHCIG's operation, as the provider of key public services in the new area, remains closely linked to that of the sponsor's budget. Historically, BHCIG has enjoyed a combination of capital injections and financial subsidies. BHCIG received CNY14.6 billion in debt swap and CNY535 million in capital injection from the government in 2016. Fitch believes government financial support should continue considering BHCIG's strategic importance. Standalone Financial Profile 'Weak': BHCIG's financial profile is borne by large capital expenditure, negative free cash flow and high leverage, with characteristics of a 'B' standalone rating. BHCIG repaid some of its debt in 2016 as part of the debt swap, which slightly improves its credit metrics, although its total debt/total assets of 58% remains high. Fitch expects Tianjin's tight control and support to mitigate these risks, despite ongoing infrastructure developments in Binhai New Area. RATING SENSITIVITIES An upgrade of Fitch's credit assessment of Tianjin and a stronger or more explicit support commitment from the municipality may trigger positive rating action on BHCIG. A significant weakening of BHCIG's strategic importance to the city, dilution of the municipality's shareholding or reduced explicit and implicit municipality support may result in a downgrade. A downgrade could also stem from weaker fiscal performance or increased indebtedness of the municipality, leading to deterioration in Fitch's assessment of the sponsor's creditworthiness. Rating action on BHCIG would lead to similar action of the senior notes. Contact: Primary Analyst Samuel Kwok Associate Director +852 2263 9961 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Terry Gao Senior Director +852 2263 9972 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 2405 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. 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