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Fitch Affirms Jiangsu Fangyang Group at 'BB'; Outlook Stable
September 14, 2017 / 7:44 AM / 7 days ago

Fitch Affirms Jiangsu Fangyang Group at 'BB'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, September 14 (Fitch) Fitch Ratings has affirmed China-based Jiangsu Fangyang Group Co., Ltd.'s Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BB'. The Outlook is Stable. Fitch has also affirmed Fangyang's USD200 million 5.35% senior unsecured notes due 2019 at 'BB'. The notes were issued by Haichuan International Investment Co., Ltd. and are unconditionally and irrevocably guaranteed by Fangyang Commerce Trade Company Limited (FYCT), a wholly owned subsidiary of Fangyang. The notes are senior unsecured obligations of FYCT and rank pari passu with all its other obligations. In place of a guarantee, Fangyang has granted a keepwell and liquidity support deed and a deed of equity interest purchase undertaking to ensure FYCT has sufficient assets and liquidity to meet its obligations under the note guarantee. KEY RATING DRIVERS Links to Lianyungang Municipality: Fangyang's ratings are credit linked to Fitch's assessment of the creditworthiness of Lianyungang municipality, a city in north-eastern Jiangsu province. However, the ratings are not equalised due to the absence of an explicit guarantee. The linkage reflects 100% state ownership of Fangyang and the strategic importance of its operation to the municipality. This results in a high likelihood of extraordinary support, if needed. Therefore, Fangyang is classified as a credit-linked public-sector entity under Fitch's criteria. Liangyungang's Modest Credit Profile: The municipality registered economic growth of 10.0% in 2016, higher than the 6.7% national average and Jiangsu province's 8.5%. However, Lianyungang ranked 12th out of Jiangsu's 13 prefecture-level municipalities by gross regional product. Legal Status Attribute Midrange: Fangyang is registered as a wholly state-owned limited liability company under China's company law, which means it is subject to bankruptcy. The municipal government delegates the supervision of Fangyang to the management committee of Lianyungang's Xuwei New District. Fangyang's major decisions - for instance, M&A, spinoffs, bankruptcy and liquidation - would require verification and approval from Lianyungang municipality. The municipality did not plan to dilute its shareholding in Fangyang as at August 2017. Strategic Importance Attribute Midrange: Fangyang is integrated into the National East-Central-West Regional Cooperation Demonstration Region within Lianyungang's Xuwei New District. Fitch expects Fangyang's important role of implementing the blueprint of the municipal and central governments to continue in the medium term. The entity is the sole developer of Xuwei New District's large-scale infrastructure projects and affordable housing. It also provides ancillary services to resident companies in the area. Government Integration Attribute Midrange: Fangyang received around CNY142 million in government subsidies and grants in 2016, compared with CNY229 million in 2015. The government also offered Fangyang a debt swap of CNY700 million in 2016. The municipal government and Xuwei New District management committee have pledged to continue supporting Fangyang to ease its debt-servicing pressure, enhance financial flexibility and support capital expenditure for urban infrastructure development. Fitch expects the strength of government support to persist in the medium term. Control Attribute Midrange: Fangyang's board members are mainly appointed by Lianyungang municipality and major projects require municipal approval. The municipality closely monitors Fangyang's financing plan and debt levels and the company is required to regularly report its operational and financial results to the municipality and the Xuwei New District management committee. Weak Standalone Profile: As a public-sector entity, Fangyang continues to incur large capex, negative free cash flow and high leverage. Account receivables from contracting government entities continued to rise in 2016, increasing by 88.5% from the previous year to represent around 35% of Fangyang's current assets. Total debt increased by 41% to CNY19.8 billion, causing total debt/Fitch-calculated EBITDA to reach 17.7x, from 12.8x in 2015. FFO/debt and interest coverage remains weak and Fitch expects the trend of large capex, negative free cash flow and high leverage to continue in medium term. RATING SENSITIVITIES An upgrade of Fitch's credit view on Lianyungang municipality as well as a stronger or more explicit support commitment from the municipality may trigger positive rating action on Fangyang. Significant weakening of Fangyang's strategic importance to the municipality, dilution of the municipality's shareholding to below 75% or lower explicit and implicit municipality support may result in a downgrade. A downgrade could also stem from weaker fiscal performance or increased indebtedness of the municipality, leading to a deterioration in its fiscal strength. Rating action on Fangyang would lead to similar action on the rating of the US dollar notes. Contact: Primary Analyst Janet Liu Associate Director +852 2263 9983 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 Raffaele Carnevale Senior Director +39 02 87 90 87 203 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. 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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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