July 6, 2017 / 3:11 AM / 3 years ago

Fitch Assigns Beijing Capital Group's Notes Final 'BBB' Rating

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, July 05 (Fitch) Fitch Ratings has assigned Central Plaza Limited's USD100 million 3.7% senior notes due 2020 a final rating of 'BBB'. The notes are unconditionally and irrevocably guaranteed by International Financial Center Property Ltd., a wholly owned subsidiary of Beijing Capital Land Ltd. (BCL; BB+/Stable), which is in turn a 54.5% directly owned listed subsidiary of Beijing Capital Group Company Limited (BCG; BBB/Negative). The notes are rated at the same level as BCG's senior unsecured rating, as BCG has granted a keepwell and liquidity support deed and a deed of equity interest purchase undertaking to ensure that the issuer and guarantor have sufficient assets and liquidity to meet their respective obligations for the senior notes. The proceeds of the notes will be used mainly to meet BCL's refinancing needs and to pay the interests of current indebtedness. Fitch's Negative Outlook on BCG reflects our belief that leverage will continue to rise, as well as the weak interest coverage on the holding company (holdco) level as of end-2016. The infrastructure segment leverage has deteriorated over the last 12 months due to the inclusion of the new subway, Beijing's subway Line 14. The property segment has remained highly leveraged regardless of the development of the holdco's land in Daxing, a 3 million square metre (sqm) piece of land directly held by the holdco in Beijing's suburban district. Development of Daxing is likely to provide a weaker buffer than Fitch had previously expected due to the timing lag of cash upstream to the holdco. Fitch will take negative rating action if BCG fails to generate sufficient cash inflow from the holdco's land so that BCG's ratio of dividend and interest income to interest expense remains below 1.2x. KEY RATING DRIVERS Environment Protection Leverage Deterioration: BCG's subsidiary, Beijing Capital Co. Ltd. (BCC), continues to operate the core environmental protection business for BCG. BCC has had a high capex and acquisition programme since 2014 due to its expansion in the waste-management business. BCC's free cash flow (FCF) remained negative in 2016 despite a lower capex of around CNY4.5 billion in 2016, which was lower than the CNY6 billion in both 2014 and 2015. We believe BCC's FCF will remain negative in the next three years as operating cash flow generation lags capex by two to three years - due to the construction period for projects. Fitch expects BCC's FFO-adjusted net leverage to be sustained above 12x in the expansion phase, putting pressure on BCG's standalone rating. The segment credit profile is commensurate with a high 'B' rating. Weak, Unstable Interest Coverage: The holdco's ratio of dividends to interest expense remained below 1x in 2015 because the holdco's total debt increased by more than CNY6 billion. The ongoing disposal of non-core assets helps to reduce total debt and hence interest expense, but Fitch does not expect cash flow from the disposal to uphold the ratio. However, BCG could generate enough cash flow to deleverage if it successfully develops its 3 million sqm Daxing land and 38 million sq m of land in the Beijing-Tianijn-Hebei region. Daxing Asset Realisation Credit Positive: BCG launched the Meilanwan social housing project in Daxing in 2016. The project accounts for less than 10% of the Daxing land area, and is likely to generate more than CNY5 billion in revenue. The deduced land valuation from the Meilanwan project is considerably higher than our previous estimate. Fitch continues to assess BCG's property segment on a consolidated basis. Our expectation of the decline in this sector's leverage (as measured by net debt/adjusted inventory) to less than 50% for the next three years supports BCG's ratings. A higher valuation of the Daxing land is a main driver as BCL, whose standalone credit profile is assessed at 'B+', saw little change in its 2016 leverage at 67.8% compared with 65.2% (restated) in 2015, and its deleveraging may not be likely in 2017. Lack of improvement in the credit profile of BCG's property segment may pressure its ratings. Stable Infrastructure: BCG's Beijing MTR Co., Ltd (Beijing MTR) has started consolidating revenue from its Line 14 subway investment in 2016 under its franchising contract with the Beijing government. The CNY13 billion capex for Line 14, initially funded by Beijing Infrastructure Investment Co Ltd (A+/Stable), will be repaid mostly with debt funding in 2016-2017. At the same time, Beijing MTR has started its Line 16 subway investment. Fitch expects Beijing MTR's leverage to rise due to its large capex, but to remain manageable, with EBITDA interest coverage of above 3x. Leverage at BCG's Tianjin Beijing Expressway Co., Ltd remains high, with an FFO-adjusted net leverage above 12x at end-2015. This has dragged down the infrastructure segment's overall credit profile. BCG is considering restructuring the segment's assets as part of its ongoing deleveraging initiative. Fitch assesses the infrastructure segment's credit profile in line with a low 'BBB' category. Moderate Government Support: BCG's ratings continue to benefit from a two-notch uplift due to its moderately strong linkage with the Beijing municipal government. BCG acts as an aggregator of private capital to be channelled towards investment in public goods, such as subways, environmental facilities and primary land development in the greater Beijing region, as well as financial services - such as government-guaranteed loans for Beijing's SME and agriculture businesses. DERIVATION SUMMARY BCG's standalone credit profile assessment at 'BB+'/Negative is based on the weighted-average credit profile of BCG's three core business segments: property, infrastructure and environment protection. The standalone rating encompasses a high 'BB' category consolidated property segment (including Daxing and Tianjin land directly held by BCG, as well as BCL), a low 'BBB' category infrastructure segment, and a high 'B' category environment-protection segment. BCG's final rating pf 'BBB'/Negative includes a two-notch uplift based on a bottom-up approach in accordance with Fitch's Parent and Subsidiary Linkage criteria; reflecting its moderately strong operational and strategic linkage with the Beijing municipal government. The government linkage is comparable with Beijing Capital Development Holding (Group) Co., Ltd. (BBB-/Stable) which also received a two-notch uplift, but is less than the three notches applied to Beijing Automotive Group Co Ltd (BAIC Group, BBB+/Stable) - because the auto industry is a pillar industry and BAIC Group is Beijing's largest tax-payer and employs over 100,000 people, the majority being local residents. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - the same assumptions as for BCL's rating case - Beijing MTR's revenue to increase by 40% in 2016; Line 14's CNY13 billion capex to be paid off mostly by debt in 2017 - BCC's revenue to drop by 10% in 2016. Capex sustained above CNY6 billion in 2017-2018 RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: - holdco's land failing to generate sustainable cash inflow, so that BCG's ratio of dividend and interest income to interest expense remains below 1.2x (2015: 0.4x) - further deterioration of the credit profiles of BCG's three core subsidiaries Positive: The Negative Outlook on BCG's IDR may be revised to Stable if the above factors do not materialise within 12 months. LIQUIDITY Sufficient Liquidity: Fitch expects BCG to have sufficient liquidity to service its interest expenses at the holdco level, given CNY57 billion in undrawn committed bank facilities as of end-March 2017. The dividends continue to be lower than the interest expenses at the holdco level, although BCG has bank facilities and lending to subsidiaries that it can call back to meet its liquidity needs. The major use of funds other than for debt servicing would apply in the event of acquisitions. Such acquisitions are usually discussed at length with the banks and Beijing SASAC to ensure funding is in place before the whole acquisition goes ahead. Contact: Primary Analyst Winnie Guo Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Date of Relevant Rating Committee: 12 January 2017 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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