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Jan 8 (The following statement was released by the rating agency)
Fitch Ratings has upgraded China State Construction International Holdings Limited's (CSCI) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BBB' from 'BBB-'. The Outlook on IDR is Stable. The rating action follows Fitch's reassessment of the credit profiles of CSCI's parent companies.
KEY RATING DRIVERS
Group Linkages Drive Ratings: CSCI is 57.1% owned by China Overseas Holdings Limited (COHL), which in turn is fully owned by China State Construction Engineering Corporation Limited (CSCECL). COHL's largest subsidiary is China Overseas Land & Investment Limited (COLI, 'BBB+'/Stable), one of the largest homebuilders in China. The continued strong performance of COLI, which generates the highest operating profit among Chinese homebuilders and remains lowly levered, drives Fitch's positive reassessment of COHL's credit profile, resulting in the upgrade of CSCI's ratings.
COHL's credit profile is further supported by Fitch's view that its parent, CSCECL, China's largest engineering & construction company, is of high strategic importance to the central government. CSCECL is 55.64% indirectly owned by State-Owned Assets Supervision & Administration Commission of the State Council. CSCI's rating is driven by its strong operational linkage with its parent companies and strong legal ties in the financing agreements within the group, in line with Fitch's 'Parent and Subsidiary Rating Linkage' criteria. The Stable Outlook reflects Fitch's expectation that CSCI will maintain strong linkages to its parent companies.
CSCI's Performance Stable: In the past year, CSCI maintained its solid orderbook growth and leading positions in the Hong Kong and Macau construction markets. CSCI had low leverage, as measured by Fitch defined funds from operations adjusted net leverage, of less than 1.5x as of end-2012. Fitch expects CSCI to maintain steady EBITDAR margins of over 10%, and its leverage to remain at more than 1.0x after 2013, driven by expansion in Build-Transfer (BT) projects.
BT Counterparty Risks Well-managed: CSCI's BT projects in infrastructure and affordable-housing are for local government vehicles in China. To manage the counterparty risk, CSCI not only requested guarantees and collaterals, but also teamed up with CSCECL during the negotiation and execution process including project evaluation. The effects of these measures are visible in CSCI's accounts receivables for 1H13, which were paid on time or in advance.
By adopting a top-down approach for the ratings of this entity under Fitch's parent and subsidiary rating methodology, the agency's specific financial rating triggers are set and monitored based on non-public financial disclosures from the parent entities, and therefore changes to the ratings of CSCI will be dependent on any changes in the non-public financial profile of its parent entities. Publicly disclosed ratings triggers for CSCI include:
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- Weakening of credit profile of CSCI's parent group companies
- Weakening linkages between CSCI and its parent companies
Positive: Positive rating action is not envisaged for the next 12-18 months as Fitch does not expect positive rating action on COLI, the key driver of COHL's credit profile.