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June 16 (The following statement was released by the rating agency)
Fitch Ratings has assigned Beijing Infrastructure Investment's (BII; A+/Stable) USD2bn medium-term note (MTN) programme an expected rating of 'A+(EXP)' and the proposed senior unsecured Chinese yuan notes to be issued under the programme an expected rating of 'A+(EXP)'. Notes issued under the MTN program may be in any currency or of any tenor. The proceeds of the proposed Chinese yuan notes issued will be used primarily for the development of the urban railway transit system in Beijing, as working capital and for general corporate purposes.
The notes under the MTN programme will be issued by Eastern Creation II Investment Holdings Ltd, and are unconditionally and irrevocably guaranteed by Beijing Infrastructure Investment (Hong Kong) Limited (BII HK), a wholly owned subsidiary of BII. The notes under the MTN programme will be senior unsecured obligations of BII HK and also rank pari passu with all other obligations of BII HK.
In place of a guarantee, BII has granted a keepwell and liquidity support deed and a deed of equity interest purchase undertaking to ensure that BII HK has sufficient assets and liquidity to meet its obligations under the guarantee for the notes under the MTN programme.
The notes under the MTN programme are rated at the same level as BII's IDR, given the strong link between BII HK and BII and because the keepwell and liquidity support deed and deed of equity interest purchase undertaking transfer the ultimate responsibility of payment to BII.
In Fitch's opinion, both the keepwell and liquidity support deed and the deed of equity interest purchase undertaking signal a strong intention from BII to ensure that BII HK has sufficient funds to honour the debt obligations. The agency also believes BII intends to maintain its reputation and credit profile in the international offshore market, and is unlikely to default on its offshore obligations. Additionally, a default by BII HK could have significant negative repercussions on BII for any future offshore funding.
Fitch would like to emphasise that the MTN programme's rating is for the programme in general and each individual issue under it may not be assigned the same rating as the programme's.
The final ratings on the proposed MTN programme and CNY notes are contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Links to Beijing Municipality: BII's ratings are credit linked to the Beijing Municipality, the capital of China. BII provides urban rail transport services and is 100% owned by the municipality. A multi-year funding integration with the municipal budget, strong government oversight of its capital expenditure and borrowing plan, and the strategic importance of BII to the municipality result in a strong likelihood of extraordinary support, if needed. Therefore, BII is classified as a dependent public sector entity under Fitch Ratings' criteria.
Ongoing Funding from Municipality: BII's operations are heavily subsidised by the Beijing Municipality. The municipal government has also committed to provide annual capital grants of CNY15.5bn for 2013-35 to continue subsidising BII's operations and to cover BII's funding needs to expand its rail network.
Strong Fiscal Performance of Beijing: Beijing Municipality has robust budgetary performance, a strong and well-diversified fundamental socio-economic profile and a very close relationship with the central government (A+/Stable) as the capital city. The resilient property market in Beijing also strengthens the municipality's fiscal flexibility. These strengths are partly mitigated by its moderately high tax-supported municipal debts, contingent liabilities arising from its municipal government-owned entities as well as relatively weak transparency.
Important Role in Urban Transportation: BII is the sole urban rail transport arm of the Beijing Municipality through which the government executes its rail transportation policy. Underground rail transportation has become the key solution to the city's heavy congestion in surface transportation, which stems from rapid population growth.
Tight Control by Beijing: The members of both the board of directors and board of supervision of BII are mainly appointed by the municipal government of Beijing. BII's rail network development plan needs approvals from the central government's National Development and Reform Commission (NDRC), while BII's related financing plan and debt level are also closely monitored by the municipal government. Moreover, BII is also required to report its quarterly operational and financial results to the municipal government.
Network Expansion: Under the plan approved by NDRC, BII's rail network will expand from 442km to 664km by 2016. The ambitious expansion increases the entity's execution risk and financial burden. Moreover, the aggressive development plan by BII's 29.8% owned listed property development subsidiary, Metro Land Corporation Ltd., also makes the entity more vulnerable to headwinds in China's volatile property market.
BII undertakes investment, financing, initial stage planning, operation and development of the urban rail transit system in Beijing. As at end-2013, there were 17 inter-connecting lines in operation in the Beijing urban rail transit system, out of which the company operated 14 lines.
Significant changes to BII's strategic importance or a diluted government shareholding and/or reduced explicit and implicit municipal government support could lead to wider rating gap between BII and Beijing Municipality.
A negative rating action could also stem from a weaker fiscal performance and/or greater indebtedness of the municipal government resulting in a lowering of Fitch's internal assessment of Beijing's creditworthiness.
Any rating action on BII would be replicated with similar rating actions on the MTN programme and the rated notes.