October 26, 2017 / 9:06 AM / a year ago

Fitch Affirms Suqian Economic Development Corp at 'BB'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, October 26 (Fitch) Fitch Ratings has affirmed Suqian Economic Development Corporation's (SEDC) Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BB'. The Outlook is Stable. Fitch has also affirmed the rating on the USD150 million 5.375% senior unsecured bonds issued by Suqian Economic Development (BVI) Co., Limited at 'BB'. KEY RATING DRIVERS Linked to Suqian Municipality: The ratings of SEDC remain credit-linked to, but not equalised with, Fitch's internal assessment of the creditworthiness of Suqian Municipality. This is based on our assessment of SEDC's key attributes, which remains unchanged. These include SEDC's 100% ownership by the municipality, its high integration with the municipal budget and a mid-range assessment of the entity's strategic importance to the municipality and legal status. These factors result in a high likelihood of extraordinary support, if needed, from the municipality. Therefore, SEDC is classified as a credit-linked public-sector entity under Fitch's criteria. Suqian's Stable Credit Profile: Suqian Municipality's gross regional product (GRP) grew steadily over 2016, and it remains one of the top 100 cities among the more than 300 cities in China, measured by GRP. Suqian's moderate GRP and per capita GRP are mitigated by stable fiscal performance and modest direct risk. Government Integration Attribute Unchanged at Stronger: Most of SEDC's revenue is generated from infrastructure construction in the Suqian Economic and Technological Development Zone (ETDZ), hence SEDC's profitability is dependent on the government's schedule for the repurchase of projects and settlement of payment. SEDC also heavily relies on government subsidies to finance its operations and debt servicing. SEDC received subsidies of CNY319 million in 2014, CNY372 million in 2015 and CNY413 million in 2016. Furthermore, SEDC has swapped about CNY3.8 billion debt as of end-2016 into government debt. Strategic Importance Attribute Unchanged at Mid-Range: SEDC remains the major local government financing vehicle established for developing and managing infrastructure and social housing in Suqian ETDZ. Suqian ETDZ is a national-level development zone that accounted for more than 12.5% of Suqian Municipality's 2106 GRP. SEDC plays a vital role in implementing the government's development blueprint for the zone. Control and Supervision Attribute Assessed at Stronger: SEDC is ultimately wholly owned by the municipal government. All of its board members have been appointed by the government. Major projects and investments require the government's approval. SEDC's financing plan and debt levels are closely monitored by the government, and the company is required to report its operational and financial results to the government on a regular basis. Weak Standalone Profile: SEDC's financial profile in the past three years was characterised by large capex, negative free cash flow and high leverage. Fitch expects this trend to continue in the medium term, driven by the issuer's project pipeline. Also, any extension in settlement of project buybacks or receivables from Suqian Municipal Government could adversely affect SEDC's liquidity. RATING SENSITIVITIES Linkage With Municipality: A stronger or more explicit support commitment from Suqian Municipality may trigger a positive rating action on SEDC. Significant changes to SEDC's strategic importance, dilution in the government's shareholding, and/or reduced government support, could result in a downgrade. Creditworthiness of Municipality: An upgrade of Fitch's internal credit view on Suqian Municipality may trigger a positive rating action on SEDC. Any deterioration of the credit profile of Suqian Municipality could lead to a downgrade of SEDC's rating. Contact: Primary Analyst Jean Luo Associate Director +852 2263 9952 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Lorraine Liu Associate Director +852 2263 9992 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria 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 Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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