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Fitch Rates Qingdao City Construction's USD Bonds 'BBB+(EXP)'
November 16, 2017 / 12:27 PM / a month ago

Fitch Rates Qingdao City Construction's USD Bonds 'BBB+(EXP)'

(The following statement was released by the rating agency) HONG KONG, November 16 (Fitch) Fitch Ratings has assigned Qingdao City Construction Investment Group's (QCCI; BBB+/Stable) proposed US dollar senior unsecured bonds an expected rating of 'BBB+(EXP)'. The offshore bonds will be issued by HongKong International (Qingdao) Company Limited (HKIQD) and benefit from a keepwell deed, a deed of equity interest purchase undertaking and an irrevocable cross-border US dollar stand-by facility agreement issued by QCCI. In Fitch's opinion, the keepwell deed, the deed of equity interest purchase undertaking and the cross-border US dollar stand-by facility signal QCCI's strong intention to ensure that HKIQD has sufficient funds to honour its debt obligations. The agency also believes QCCI intends to maintain its reputation and credit profile in the international offshore market, and is unlikely to default on offshore obligations. Additionally, a default by HKIQD could have significant negative repercussions on QCCI for any future offshore funding. The final rating is contingent upon the receipt of final documents conforming to information already received. KEY RATING DRIVERS Links to Qingdao Municipality: QCCI's ratings are credit linked to, but not equalised with, Fitch's internal assessment of the creditworthiness of China's Qingdao Municipality. Fitch's view is based on QCCI's 100% ownership by the municipality while registered as a state-owned limited liability company under Chinese company law; the municipality's strong oversight of the company's finances and operations; and the fiscal support it has received from the municipality. These factors result in a strong likelihood the municipal government would extend extraordinary support to QCCI, if needed. Therefore, QCCI is classified as a credit-linked public-sector entity under our criteria. Qingdao's Solid Creditworthiness: Qingdao ranked first in Shandong province in terms of Gross Regional Product (GRP) in 2016. Qingdao Municipality has a solid budgetary performance, a diversified socio-economic profile and more fiscal flexibility than other cities in Shandong Province due to its status as one of the "cities specifically designated in the state plan", which grants it provincial-level economic management authority. The municipality's strengths are offset by its volatile capital revenue from sales of land use rights, moderately high tax-supported municipal debt and other contingent liabilities arising from municipal-owned entities. Strategic Importance Attribute Midrange: QCCI is the primary investment vehicle of Qingdao Municipality and plays an important role in implementing the municipal government's blueprint for urban planning and municipal construction. It plays a key role in assisting the municipality in its development of large city infrastructure projects and affordable social housing. QCCI is also the exclusive concessionaire for primary land development in several key areas of Qingdao. Control, Supervision Assessed at Stronger: QCCI's main activities, such as urban development and primary land development, require approval from Qingdao Municipality. Its financing plan and indebtedness are also closely monitored by the municipality. QCCI is also required to report its operational and financial results to the municipality regularly. All of QCCI's major capital expenditures (amounts above CNY60 million), investments (amounts above 10% of net assets), and funding plans need to be endorsed and approved by the municipal authorities. Integration Attribute Assessed at Midrange: QCCI received government grants of CNY1,213 million, CNY379 million and CNY342 million for 2014, 2015 and 2016 respectively. Fitch expects the government's subsidies and capital injections to remain at the same level in the medium term, as QCCI continues to take municipal infrastructure projects at the request of the Qingdao government. Legal Status Midrange: QCCI is registered as a state-owned limited liability company and hence is allowed to go bankrupt. The attribute was assessed at Midrange, as QCCI's legal status does not indicate automatic absorption of its liabilities by Qingdao Municipality. Weak Standalone Profile: QCCI's Fitch-adjusted debt to EBITDA of 28x and interest coverage of 0.7x indicate a weaker standalone profile than its present Issuer Default Rating (IDR). Fitch believes the trend in leverage and coverage will continue due to ongoing urbanisation and infrastructure improvement. QCCI's revenue and profit can be quite volatile as the company is exposed to the property, financial service and trading sectors. Sustained support from Qingdao Municipality is likely to mitigate the risk, in Fitch's opinion. RATING SENSITIVITIES Bond Rating: Any rating action on QCCI will result in a similar rating action on the proposed bonds. Linkage with Municipality: Stronger or more explicit municipal support may trigger positive rating action on QCCI. A weakening of QCCI's strategic importance to the municipality, weakening of the municipal government's controlling shareholding to below 75%, or reduced municipal support could lead to a wider rating gap between QCCI's IDR and Fitch's internal assessment of the creditworthiness of Qingdao Municipality. Creditworthiness of Municipality: An upgrade or downgrade of Fitch's internal assessment of Qingdao Municipality's creditworthiness may trigger similar rating action on QCCI. 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 Terry Gao Senior Director +852 2263 9972 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 2405 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 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#solicitation 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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