Rating Action: Moody's assigns Baa3 rating to Zhoushan City Investment Group's USD bond
Global Credit Research - 07 Dec 2020
Hong Kong, December 07, 2020 -- Moody's Investors Service has assigned a Baa3 rating to the USD100 million senior unsecured bond issued by Zhoushan City Investment Group Corp Ltd. (ZSCI, Baa3 stable).
RATINGS RATIONALE
ZSCI's Baa3 issuer rating is based on (1) the Zhoushan government's capacity to support (GCS) score of baa2; and (2) Moody's assessment of how the company's characteristics affect the Zhoushan government's propensity to provide support, resulting in a one-notch downward adjustment.
Moody's assessment of Zhoushan's GCS score reflects (1) its status as a prefectural-level city without direct reporting lines to the central government and its positioning at a relatively lower administrative level in Moody's assessment of the hierarchy of China's regional and local governments (RLGs); (2) its greater reliance on central government transfers; and (3) its relatively high state-owned enterprises (SOEs)-related contingent liability risks.
ZSCI's Baa3 rating also reflects the Zhoushan government's propensity to support the company, which is based on (1) its status as the largest local government financing vehicle (LGFV) by asset size in Zhoushan city; (2) its dominant market position, implementing around 70% of the city's public-policy projects such as infrastructure construction, affordable housing projects and primary land development in Zhoushan city and Zhoushan Islands National New Area -- one of the 19 national new areas in China and the only one in Zhejiang province; (3) its ultimate ownership by the Zhoushan government; (4) its track record of receiving government payments, which generally cover around 40% of its annual capital spending, and its good access to funding; and (5) its limited exposure to commercial activities and contingent liabilities.
However, the one-notch downward adjustment from Zhoushan government's GCS score reflects ZSCI's growing debt relative to government payments received. The company's total debt -- which is used mainly to fund public-policy projects that support the rapid development of Zhoushan city and the Zhoushan Islands National New Area -- grew at a compound annual growth rate (CAGR) of 47% in 2017-19. ZSCI's increasing debts are to meet funding needs as infrastructure investment and government payment timings may not exactly match.
Although ZSCI has a relatively short operating history compared with other major SOEs and LGFVs in Zhoushan city, it grew very fast to become the largest LGFV by asset size in 2019, through the consolidation of local SOEs/LGFVs and the implementation of many public-policy projects. ZSCI's market share in the city's public-policy projects and its strategic importance to the Zhoushan government will continue to rise, given that the company will undertake the bulk of these projects in the coming years.
ZSCI's rating also takes into account the following environmental, social and governance (ESG) factors.
The company's exposure to environmental risks via its infrastructure projects is low. ZSCI manages such risks by conducting environmental studies and planning before each project starts, and by maintaining close supervision during the construction phase.
ZSCI bears high social risks as it implements public-policy initiatives by building public infrastructure in Zhoushan city. Demographic changes, public awareness and social priorities shape the company's development targets and ultimately affect the Zhoushan government's willingness to support ZSCI.
Governance considerations are also material to the rating, as ZSCI is subject to oversight by and the reporting requirements of Zhoushan government, reflecting its public-policy role and status as a government-owned entity.
The stable outlook on ZSCI's issuer rating reflects (1) the stable outlook on China's sovereign rating; (2) Moody's expectation that the Zhoushan government's GCS score will remain stable; and (3) Moody's view that the control and oversight by the Zhoushan government will remain largely unchanged over the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The rating could be upgraded if (1) China's sovereign rating is upgraded or Zhoushan government's capacity to support strengthens, which could be a result of a significant strengthening in Zhoushan's economic or financial profile or its ability to coordinate timely support; or (2) ZSCI's characteristics change in a way that enhances the Zhoushan government's propensity to support, such as an increase in government payments and an improvement in the predictability of government payment mechanisms, whereby dedicated fiscal budget allocations and transfers from higher-tier governments can consistently cover a large share of the company's operational and debt-servicing needs.
The rating could be downgraded if (1) China's sovereign rating is downgraded or the Zhoushan government's GCS score weakens, which could be the result of a material weakening in Zhoushan's economic or financial profile or its ability to coordinate timely support; (2) there are changes in Chinese government policies that prohibit RLGs from providing financial support to government-owned public service companies; or (3) ZSCI's characteristics change in a way that lowers the Zhoushan government's propensity to support, such as through (a) material changes in its businesses, including substantial expansions into commercial activities at the cost of public services, or substantial losses in commercial activities; (b) a decline in the company's dominant position in undertaking public policy projects in Zhoushan city; or (c) a rapid increase in its debt and leverage with reduced corresponding government payments.
The principal methodology used in this rating was Local Government Financing Vehicles in China Methodology published in July 2020 and available at https://ift.tt/37IvinU. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Established in 2013, Zhoushan City Investment Group Corp Ltd. (ZSCI) is 90% owned by the Zhoushan State-owned Asset Supervision and Administration Commission (Zhoushan SASAC) and 10% owned by Zhejiang Financial Development Co., Ltd. ZSCI was set up by Zhoushan government to support the rapid development of Zhoushan city and the Zhoushan Islands National New Area. The company is the designated entity mandated by the Zhoushan government to implement public-policy projects, and has a dominant market share of around 70% in the city's infrastructure construction, primary land development and affordable housing projects as of the end of 2019. It also owns a joint venture that has a monopoly position in piped gas distribution in Zhoushan. ZSCI reported a total revenue of around RMB1.3 billion and total assets of RMB44 billion as of the end of 2019.
The local market analyst for this rating is Sarah Xu, +86 (212) 057-4030 .
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://ift.tt/1m2F3St.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ift.tt/3fepPaS.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Ying Wang Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Gary Lau MD - Corporate Finance Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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