November 16, 2017 / 8:56 AM / a year ago

Fitch Affirms Changsha Pilot Investment at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, November 16 (Fitch) Fitch Ratings has affirmed China-based Changsha Pilot Investment Holdings Co. Ltd's Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BBB-'. The Outlook is Stable. Fitch has also affirmed Changsha Pilot's USD350 million 3.1% senior unsecured notes due 2019 at 'BBB-'. The bonds were issued directly by Changsha Pilot and are rated at the same level as its Issuer Default Rating as they will constitute direct, unconditional, unsubordinated and unsecured obligations of Changsha Pilot and rank pari passu with all its other senior unsecured obligations. KEY RATING DRIVERS Linked to Changsha Municipality: Changsha Pilot's ratings are credit linked to, but not equalised with, Fitch's internal assessment of the creditworthiness of Changsha Municipality. This is reflected in the municipality's 100% ownership of Changsha Pilot, strong control and oversight by the government, and to a lesser extent, the strategic importance of the entity and weaker integration of the entity with the government. These factors indicate Changsha Pilot is likely to receive state support, if needed. Changsha's Strong Creditworthiness: Changsha's economy continued to grow in 2016 with gross regional product (GRP) reaching CNY932.37 billion. The 2016 growth rate of 9.4% was above that of China and Hunan province. The city's fiscal income continued to increase strongly, driven by its diversified and well-developed industries. The city has strong fiscal revenue, high operating margin, a controllable pace of debt growth and stable support from provincial government. Legal Status Mid-Range: Changsha Pilot is now 100% effectively owned by Changsha State-owned Assets Supervision and Administration (Changsha SASAC) and the government has no intention to dilute its shareholdings as of November 2017. Changsha SASAC previously held 60% of Changsha Pilot, with the remaining 40% held in trust to be repurchased by a wholly owned subsidiary of Changsha SASAC. The repurchase of the 40% stake was completed in August 2017. Strategic Importance Mid-Range: Changsha Pilot is the major local government financing vehicle in Hunan Xiangjiang New Area that carries out the government's strategic development plans for the area. The New Area was approved by the central government in 2015 as the first national level New Area in central China. Changsha Pilot plays a leading role in development, construction and management of Hunan Xiangjiang New Area's land and infrastructure. Fitch's assessment of Changsha Pilot's strategic importance to the state is constrained by the concentration of its business in a small area in Changsha. Tight Control and Supervision: Changsha municipality closely monitors and controls Changsha Pilot. The board of supervisors is the highest supervision body of company; the board of directors is the highest decision-making body of company, primarily responsible for determining the operating plans and investment proposals, making the annual financial budget plans and major financing and restructuring plans. Except for the employee representative, Changsha SASAC appoints and approves all other members of the board. Integration Attribute Weaker: Government subsidies received for operation, which are classed as non-operating revenue, remained steady in 2016. There was no additional cash injection by the government in 2016. Subsidies received for public projects continue to account for a rather limited portion (less than 5%) of the company's total revenue. The government continued to support Changsha Pilot's business via land cost reimbursement and asset re-purchases to reduce the company's capital spending. While the mismatch of cash influx and capex continued, accounts receivable due from the government started to stabilise in 2016. Weak Standalone Profile: Changsha Pilot is highly leveraged due to its capital intensive land and infrastructure development business. In 2016, its debt structure slightly improved as short-term financing decreased. However, its total debt/Fitch calculated EBITDA continued to mount as the overall debt level rose. The company is not likely to deleverage in the medium term, and funds from operation are likely to remain negative and EBITDA interest coverage likely to stay below 1x. The standalone profile is also weakened by extensions of the reimbursement period of land cost and asset repurchase agreement, which leave the company with high inventory and receivables. RATING SENSITIVITIES Linkage with Municipality: A stronger or more explicit support commitment from Changsha Municipality may trigger a positive rating action. Significant changes to Changsha Pilot's strategic importance, a diluted municipal shareholding, and/or reduced explicit and implicit municipality support, could trigger a negative rating action. Creditworthiness of Municipality: An upgrade or downgrade of Fitch's internal credit view on Changsha may trigger a similar rating action on the entity. Rating action on Changsha Pilot Investment would lead to similar action on the rating of its US dollar notes. Contact: Primary Analyst Janet Liu Associate Director +852 2263 9983 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 Guido Bach Senior Director +49 69 768076 111 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria 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 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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