December 26, 2017 / 8:07 AM / a year ago

Fitch Rates Gansu Provincial Highway's Euro Notes Final 'BBB-' on RWP

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, December 26 (Fitch) Fitch Ratings has assigned Gansu Provincial Highway Aviation Tourism Investment Group Co., Ltd.'s (GHAT, BBB-/Rating Watch Positive) EUR410 million senior unsecured notes final ratings of 'BBB-', on Rating Watch Positive. The notes, which have coupon of 1.875% and are due 2020, are directly issued by the China-based toll-road operator. The notes are rated at the same level as GHAT's Long-Term Foreign-Currency Issuer Default Rating (IDR). The notes rank pari passu with all GHAT's other present and future unsecured and unsubordinated obligations. Proceeds will be used for funding highway development projects and the company's working capital and general corporate purposes. The assignment of the final rating follows the receipt of the bond issue documents conforming to the information already received. The final rating is in line with the expected rating assigned on 23 November 2017. KEY RATING DRIVERS Rating Watch on Exposure Draft: GHAT's IDR was placed on Rating Watch Positive 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 Gansu Province: Fitch classifies GHAT as an entity credit-linked to Gansu province using a top-down approach under its 'Rating of Public Sector Entities - Outside the United States' criteria. The link reflects strong government oversight and supervision, high strategic importance of GHAT's public-sector business and mid-range integration with the provincial budget. These factors indicate that GHAT would be likely to receive extraordinary support from the government, if needed. Legal Status - Mid-Range: GHAT is registered as a state-owned limited liability company under Chinese company law. The company is wholly owned by Gansu's State-owned Assets Supervision and Administration Commission. Strategic Importance - Strong: The provincial government has designated GHAT as the sole provincial-level state-owned enterprise responsible for developing the region's highway network. The company plays an important role in implementing the government's blueprint for transportation infrastructure construction by operating key regional highways and high-grade roads and serving as a financing vehicle for road construction. GHAT also manages and operates several key scenic areas on behalf of the provincial government. Tightly Controlled and Supervised: GHAT is controlled directly by Gansu's provincial government, which closely monitors its financing plan and debt levels and appoints or nominates GHAT's board members, except for employee representatives. In addition, the development of GHAT's expressway network needs approval from Gansu province's Department of Transportation. Integration Attribute - Mid-Range: GHAT has a record of receiving financial support from the provincial government, including subsidies, tax rebates and asset injections. The government refunded CNY1.26 billion of the fuel and business taxes levied on GHAT's major infrastructure construction projects over the past three years and has committed to injecting CNY100 million a year into GHAT to support its tourism business. Weak Financial Profile: GHAT's standalone credit profile is constrained by its high debt leverage and low coverage. Fitch expects its net debt/EBITDA to stay around 27.0x, while its interest coverage will remain at 0.8x over the next two to three years. The company generated 85.1% of its revenue through its commodity-trading business in 2016, which is mainly an agency business and makes limited profit. Over 85% of net profit was contributed by its toll-road operation business. RATING SENSITIVITIES Fitch expects to resolve the Rating Watch on GHAT's ratings within the next six months from the publication of the criteria. If the final criteria are substantially similar to the exposure draft, then the ratings are likely to be impacted after the final criteria are published. Any rating action on GHAT's IDR would result in similar action on the ratings of the euro notes. A stronger or more explicit support commitment from the Gansu provincial government may trigger positive rating action on GHAT. Significantly lower strategic importance, a diluted municipal shareholding or reduced explicit and implicit governmental support could lead to a wider rating gap between GHAT and our internal credit view of the provincial government. An upgrade of Fitch's internal credit view of Gansu province may trigger positive rating action on GHAT, while weaker fiscal performance or heightened indebtedness of the provincial government could lead Fitch to lower its internal assessment of the province's creditworthiness and trigger a downgrade of GHAT's ratings. 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 related 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 from public-sector balance sheets, address indiscriminate debt growth by government-related entities, 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 Terry Gao Senior Director +852 2263 9972 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Ark Huang Analyst +86 21 5097 3153 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 Date of Relevant Rating Committee: 19 December 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria 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 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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