January 5, 2018 / 9:01 AM / a year ago

Fitch Publishes Zhongyuan Yuzi's 'A-' IDRs; Rates Bonds 'A-(EXP)'

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, January 05 (Fitch) Fitch Ratings has published China-based Zhongyuan Yuzi Investment Holding Group Co., Ltd.'s (Yuzi) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'A-'. The Outlook is Stable. At the same time, Fitch has assigned Yuzi's proposed US dollar senior unsecured guaranteed notes an expected rating of 'A-(EXP)'. The notes will be issued by Zhongyuan Sincere Investment Co. Ltd, Yuzi's indirectly wholly owned subsidiary, and unconditionally and irrevocably guaranteed by Yuzi. The net proceeds will be used for general corporate purposes. The proposed notes are rated at the same level as Yuzi's IDR because the direct guarantee structure transfers the ultimate responsibility of payment to Yuzi. The proposed notes will constitute Yuzi's unconditional, unsubordinated and unsecured obligations. The final rating on the proposed notes is subject to the receipt of final documentation conforming to information already received. KEY RATING DRIVERS Links to Henan Province: Yuzi's rating is credit linked to, but not equalised with, Fitch's internal assessment of Henan province. This is reflected in Yuzi's 100% government ownership, strong provincial oversight on its financials, and strategic importance of the entity's operations to the entire province. These factors result in a strong likelihood of extraordinary support, if needed. Therefore, Yuzi is classified as a credit-linked public sector entity under Fitch's criteria. Henan's Strong Creditworthiness: Henan's gross regional product ranked fifth among China's provinces in 2016, with a growth rate of 8.1%, outperforming the national average. Henan is a key province under the nation's strategy to develop the Central Plains Economic Region, and thus receives financial and policy support from the central government. We expect the Henan government to maintain satisfactory fiscal performance as it is backed by predictable fiscal transfers. These strengths are mitigated by Henan's moderate level of contingent liabilities. Legal Status Attribute Mid-Range: Yuzi is registered as a state-owned limited liability company under Chinese company law. It is indirectly wholly owned by the Henan provincial government. Exclusive Centralised Financing Platform: Yuzi acts as the government's sole designated centralised financing arm for affordable social housing, urban development and industrial cluster development for Henan province. Yuzi financed the majority of the province's affordable social housing projects. Fitch expects Yuzi to continue performing this role and to expand its debt by 20%-30% per year in the next two to three years, given the large capital expenditure budgeted by the local government. Fitch assesses Yuzi's strategic importance at Stronger. Solid Track Record of Support: Yuzi has received a capital injection and various fiscal subsidies totalling CNY10.4 billion. . Fitch expects government support to continue as Yuzi shoulders an increasing amount of public-service work on behalf of the provincial government. Yuzi's integration is assessed at Mid-range. Control and Oversight Attribute Stronger: Yuzi is wholly owned by the provincial government and its board of directors is appointed by the government. The Provincial Department of Finance approves its operational and financial performance targets and reviews them quarterly. Sufficient Liquidity: As of end-2016, Yuzi had CNY6 billion in unrestricted cash on hand and CNY157 billion in unutilised bank facilities, which was sufficient to cover its short-term debt of CNY14 billion. Yuzi also has easy access to low-cost long-term funding due to its close cooperation with China's policy banks and its established reputation in capital markets. Its strong strategic link with the Henan provincial government and its strategic role in implementing the province's urban development plans could lead to a high level of extraordinary government support, if needed. RATING SENSITIVITIES A stronger or more explicit support commitment from the Henan provincial government may trigger positive rating action on Yuzi. Significantly lower strategic importance, a diluted municipal shareholding or reduced explicit and implicit governmental support could lead to a wider rating gap between Yuzi and our internal credit view of the provincial government. An upgrade of Fitch's internal credit view of Henan province may trigger positive rating action on Yuzi, 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 Yuzi'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 local and regional governments to government-related entities (GREs) such as Yuzi, which may have a practical impact on the entities' ability to service their debts. Fitch interprets such initiatives as the central government's efforts to disentangle GREs from public-sector balance sheets, address indiscriminate GRE debt growth and encourage greater market discipline. Depending on the degree of certainty and the extent of the prohibitions, the agency will take rating action that could result in 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: 4 January 2018 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 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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