Hong Kong, July 12, 2022 — Moody’s Investors Service (“Moody’s”) has affirmed Changde Economic Construction Investment Group Co., Ltd.’s (CECIG) Ba1 corporate family rating (CFR) and the Ba1 senior unsecured ratings on CECIG’s notes.

The outlook on the ratings remains stable.

“The rating affirmation reflects CECIG’s close linkage with the Changde city government as the city’s second-largest local government financing vehicle by assets, with an established track record of receiving government cash payments,” says Ying Wang, a Moody’s Vice President and Senior Analyst.

“However, CECIG’s rating is constrained by high contingent liabilities and related-party lending to state-owned enterprises, and its relatively weak access to funding,” adds Wang.              

RATINGS RATIONALE

CECIG’s Ba1 CFR incorporates (1) the Changde city government’s capacity to support (GCS) score of baa3; and (2) Moody’s assessment of how the company’s specific characteristics affect the Changde city government’s propensity to support, resulting in a one-notch downward adjustment.

Changde city government’s GCS score reflects (1) Changde’s status as a prefectural-level city in Hunan, a moderate-risk province in the central region of China (A1 stable); (2) its relatively weak economic fundamentals, including low GDP per capita and population outflows; and (3) high state-owned enterprise (SOE) liabilities compared with its fiscal revenue, which could weigh on the city’s ability to provide timely support.

CECIG’s Ba1 CFR reflects Changde city government’s propensity to support CECIG, which is based on (1) its 90% ownership by Changde city government; (2) its strategic role in undertaking a large number of infrastructure projects and public-sector services that are essential to the daily lives of residents and the economic development of Changde city; (3) its low exposure to non-policy related commercial activities and (4) its established track record of receiving government cash payments.

However, the one-notch downward adjustment from the city’s GCS score reflects (1) CECIG’s fast debt growth; (2) its relatively weak access to funding, as reflected by a moderate exposure to shadow banking and relatively high funding costs; and (3) high contingent liabilities and related-party lending.

Moody’s expects the company to maintain its strong business position in Changde city  due to its strategic role, which underpins the continued likelihood of the company receiving government financial support. The company has a good track record of receiving cash from the Changde city government in the form of operating subsidies, government bond allocations, cash injections, government buybacks of infrastructure projects and refunds of land costs, to support its capital spending and debt payments for public-policy-related investments. In 2021, CECIG received around RMB3.4 billion of total government cash payments against its capital expenditure and investment of RMB5.5 billion.

Still, CECIG’s annual investment needs for capital-intensive public projects would need to be partly funded by debt, in addition to its access to annual government payments. Moody’s expects the company’s total adjusted debt, including external guarantee, to grow to RMB60 billion–RMB63 billion over the next 12-18 months.

Moody’s expects the company to contain its reliance on high-cost financing and exposure to contingent liabilities in view of the city government’s more stringent and forward-looking supervision. However, Moody’s expects CECIG will continue to face refinancing pressure owing to the relatively weaker profile of the Changde city government compared with its regional and local government peers in developed provinces and growing risk-averse sentiment in the market.

The rating takes into account the following environmental, social and governance (ESG) factors.

CECIG bears high social risks as it implements public-policy initiatives by building, owning and operating public infrastructure in Changde city. Demographic changes, public awareness and social priorities shape the company’s development targets and ultimately affect Changde city government’s propensity to support the company.

Governance considerations are also material to the ratings because CECIG is subject to oversight and reporting requirements to Changde city government, reflecting its public-policy role and status as a government-owned entity.

Environmental risks are low for CECIG.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

CECIG’s stable rating outlook reflects (1) the stable outlook on China’s sovereign rating, (2) Moody’s expectation that the Changde city government’s GCS score will remain stable; and (3) that CECIG’s business profile, integration with, as well as control and oversight by, the Changde city government will remain unchanged over the next 12-18 months.

CECIG’s CFR could be upgraded if: (1) China’s sovereign rating is upgraded; or the Changde city government’s GCS strengthens, which could be a result of a significant strengthening in Changde’s economic or financial profile, or an improvement in its government’s ability to coordinate timely support; (2) CECIG’s characteristics change in a way that strengthens the Changde city government’s propensity to support, such as through:

– an increase in government payments and improvements in the predictability of government payments, whereby dedicated fiscal budget allocations and transfers from higher-tier governments can consistently cover a larger share of the company’s operational and debt servicing needs;

– improving access to bank loans and the public bond market as indicated by a reducing reliance on non-standard financing channels and decreasing funding costs; and

– a significant reduction in loans, guarantees or other credit exposures to external parties, compared with its equity base.

CECIG’s CFR could be downgraded if: (1) China’s sovereign rating is downgraded; or the Changde city government’s GCS weakens, which could be a result of a significant weakening in Changde’s economic or financial profile, or a deterioration in Changde city government’s ability to coordinate timely support; (2) there are changes in the Chinese government’s policies that prohibit regional and local governments (RLGs) from providing financial support to local government financing vehicles (LGFVs); (3) CECIG’s characteristics change in a way that weakens the Changde city government’s propensity to support, such as through:

– a decline in CECIG’s position as one of the dominant public service providers in Changde;

– significant changes in its businesses, including substantial expansion into commercial activities at the cost of public services, or substantial losses in commercial activities;

– rapid increases in its debt and leverage with less corresponding government payments;

– increasing reliance on high-cost financing, including debt borrowing from non-standard channels; or

– a material increase in loans, guarantees or other credit exposure to external parties, or substantial financial losses in these credit exposures

The principal methodology used in these ratings was Local Government Financing Vehicles in China Methodology published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386644. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Established in 1992, Changde Economic Construction Investment Group Co., Ltd. is 90% owned by the State-owned Assets Supervision and Administration Commission (SASAC) of the Changde city government and 10% owned by Hunan State-Owned Investment and Operation Co., Ltd.

CECIG is mandated by the Changde city government to undertake the construction and development of key public infrastructure projects, as well as the operation of some public services.

The local market analyst for these ratings is Miranda Zhai, +86 (21) 2057 4092.

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.moodys.com.

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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://ratings.moodys.com/documents/PBC_1288235.

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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

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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

Ivan Chung
Associate Managing Director
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
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By AKDSEO