December 20, 2017 / 2:44 PM / a year ago

Fitch Rates Jiangsu HanRui's Proposed USD Notes 'BB+(EXP)'; On Watch Negative

(The following statement was released by the rating agency) HONG KONG, December 20 (Fitch) Fitch Ratings has assigned Jiangsu HanRui Investment Holding Co., Ltd's (HanRui, BB+/Rating Watch Negative) proposed senior unsecured US dollar notes an expected rating of 'BB+(EXP)', on Rating Watch Negative. The notes will be issued by HanRui Overseas Investment Co., Ltd. and will be unconditionally and irrevocably guaranteed by HanRui International Investment Company Limited (HII), HanRui's wholly owned subsidiary. The notes are rated at the same level as HanRui's Issuer Default Ratings due to the strong linkage between HanRui and HII. This linkage is enhanced by a keepwell and liquidity support deed and a deed of equity interest purchase undertaking, which signal a strong intention from HanRui to meet its obligations for the proposed notes. HanRui has granted a keepwell and liquidity support deed and a deed of equity interest purchase undertaking to ensure HII has sufficient assets and liquidity to meet its obligations under the guarantee for the proposed US dollar notes. The notes will be HII's senior unsecured obligations and rank pari passu with all other unsecured and unsubordinated obligations. The proceeds will be used to replenish working capital and for general corporate purposes. KEY RATING DRIVERS Rating Watch on Exposure Draft: HanRui's IDR was placed on Rating Watch Negative (RWN) following the publication of the Exposure Draft: Government Related Entities Criteria (see "Fitch Publishes Exposure Draft on Government Related Entities Criteria", dated 27 November 2017). Linked to Zhenjiang Municipality: HanRui's ratings are credit-linked with those of Zhenjiang municipality in China's Jiangsu province. The link reflects strong oversight and supervision of HanRui by the Zhenjiang government and the company's strategic importance as the flagship local government funding vehicle (LGFV) platform for public-sector construction in Zhenjiang New Area, a national-level economic and technological development zone. Zhenjiang's Creditworthiness: Zhenjiang's economy is backed by a traditionally strong secondary industry and maintained strong gross regional product (GRP) growth of 10.6% in 2016, outperforming both Jiangsu and the national average. Zhenjiang also has a favourable socio-economic profile, despite its smaller economy, with GRP per capita that ranked fifth among Jiangsu's 13 municipalities. These strengths should mitigate the city's moderately high continent liabilities arising from its state-owned entities. Legal Status 'Mid-Range': HanRui is registered as a wholly state-owned limited liability company under Chinese company law. The attribute was assessed at Mid-Range, as HanRui's legal status does not indicate automatic absorption of its liabilities by Zhenjiang Municipality. Control 'Stronger': The Zhenjiang State-Owned Assets Supervision and Administration Commission (SASAC) is the sole and direct shareholder of HanRui. HanRui's daily operations are supervised by the Zhenjiang New Area Management Committee on behalf of Zhenjiang SASAC. The government has no plan to dilute its shareholding in HanRui. Strategic Importance 'Stronger': HanRui is the flagship urban development platform within the Zhenjiang New Area and is ranked second in total assets among the city's directly controlled LGFVs. For the first nine months of 2017, the Zhenjiang New Area accounted for 15% of the city's GDP and 17% of the tax revenue. Fitch believes Zhenjiang could see material consequences in the event of a default of HanRui, considering the company's large asset size and the economic importance of the Zhenjiang New Area. Integration 'Stronger': HanRui has received consistent government financial support, including subsidies and capital injections. Annual subsidies have averaged 148% of the company's net profit over the previous three years, demonstrating the government's commitment in maintaining HanRui as a going concern. Fitch expects continued government support to partly fund HanRui's capital expenditure and debt servicing, considering its high strategic importance. Weak Standalone Profile: HanRui's financial profile is characterised by large capital expenditure, negative free cash flow and high leverage. Its weak standalone credit metrics are not likely to see any significant improvement in the near term. Fitch expects ongoing government financial support to mitigate this risk, despite HanRui's infrastructure developments in Zhenjiang New Area. RATING SENSITIVITIES Any rating action on HanRui's IDR will result in similar action on the ratings of the proposed US dollar notes. Exposure Draft: Fitch expects to resolve the RWN on HanRui's ratings within the next six months from the publication of the criteria. Linkage with Municipality: A stronger or more explicit support commitment from Zhenjiang municipality may trigger positive rating action on HanRui. Significant changes to HanRui's strategic importance, a diluted municipal shareholding or reduced explicit and implicit municipality support could lead to a wider rating gap between HanRui and Zhenjiang. Municipality's Creditworthiness: An upgrade of Fitch's internal credit view of Zhenjiang may trigger positive rating action on HanRui. A weaker fiscal performance or higher municipality indebtedness could lead to a lowering of Fitch's internal assessment of Zhenjiang's creditworthiness and thus trigger negative rating action on HanRui. Fitch will monitor both the application of existing and any new central government laws, regulations and directives that will effectively prohibit or restrict support by the local and regional governments to the entities, with a practical impact on the entities' future ability to service their debts. Fitch interprets such initiatives as being undertaken by the central government to disentangle government-related entities (GREs) from public-sector balance sheets, address indiscriminate GRE debt growth, and encourage greater market discipline. Depending on the degree of certainty and the extent of the prohibition, the agency will take rating action which could result in either a widening of the notching or the adoption of a bottom-up ratings approach, possibly even to the extent of the removal of all support expectations. 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 Christophe Parisot Managing Director +33 1 44 29 91 34 Date of Relevant Rating Committee: 18 December 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Emerging Market Countries’ Local and Regional Governments’ Specific Securities Rating Criteria (pub. 27 Nov 2017) here Exposure Draft: Government-Related Entities Rating Criteria (pub. 27 Nov 2017) here International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating Criteria for Public Sector Revenue-Supported Debt (pub. 05 Jun 2017) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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