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Fitch Assigns Beijing Capital Group's Proposed Notes 'BBB(EXP)'
January 13, 2017 / 4:01 AM / 10 months ago

Fitch Assigns Beijing Capital Group's Proposed Notes 'BBB(EXP)'

(The following statement was released by the rating agency) HONG KONG, January 12 (Fitch) Fitch Ratings has assigned an expected rating of 'BBB(EXP)' to the proposed US dollar senior unsecured notes to be issued by Central Plaza Development Ltd. The notes are unconditionally and irrevocably guaranteed by International Financial Center Property Ltd., a wholly owned subsidiary of Beijing Capital Land Ltd. (BCL; BB+/Stable), which is a 54.5% directly-owned listed subsidiary of Beijing Capital Group Company Limited (BCG; BBB/Negative). The notes are rated at the same level as BCG's senior unsecured rating as BCG has granted a keepwell and liquidity support deed and a deed of equity interest purchase undertaking to ensure that the issuer and guarantor have sufficient assets and liquidity to meet their respective obligations for the senior notes. The proceeds of the notes will be mainly used to meet BCL's refinancing needs. The final rating on the proposed notes is contingent upon the receipt of documents conforming to information already received. KEY RATING DRIVERS Environment Protection Leverage Deterioration: BCG's subsidiary, Beijing Capital Co. Ltd. (BCC), continues to operate the core environmental protection business for BCG. BCC has had a high capex and acquisition programme since 2014 due to its expansion in the waste-management business. BCC's total capex totalled around CNY6bn in both 2014 and 2015 and is likely to remain at similar levels in the next three years. However, cash flow generation lags capex by two to three years due to the construction period for projects. Fitch expects BCC's FFO-adjusted net leverage to be sustained above 12x in the expansion phase, putting pressure on BCG's standalone rating. The segment credit profile is commensurate with a high 'B' rating. Weak and Unstable Interest Coverage: The holding company's (holdco) ratio of dividends to interest expense remained below 1x in 2015 because the holdco's total debt increased by more than CNY6bn. The ongoing non-core asset disposals help to reduce total debt and hence interest expense, but are not a sustainable way to uphold the ratio. However, BCG could generate enough cash flow to deleverage if it successfully develops its 3 million square metre (sq m) Daxing land and 38 million sq m of land in the Beijing-Tianijn-Hebei region. Daxing Asset Realisation Credit Positive: BCG launched the Meilanwan social housing project in Daxing in 2016. The project accounts for less than 10% of the Daxing land area and is likely to generate more than CNY5bn in revenue. The deduced land valuation from the Meilanwan project is considerably higher than our previous estimate. Fitch continues to assess BCG's property segment on a consolidated basis. The agency expects leverage, as measured by net debt/adjusted inventory, to be less than 50% for the next three years. A higher valuation of the Daxing land, coupled with deleveraging of BCL, whose standalone credit profile is assessed at 'B+', may improve the credit profile of BCG's property segment closer to a high 'BB' category in the near term. Stable Infrastructure: BCG's Beijing MTR Co., Ltd (Beijing MTR) has started consolidating revenue from its Line 14 subway investment in 2016 under its franchising contract with the Beijing government. The CNY13bn capex for Line 14, initially funded by Beijing Infrastructure Investment Co Ltd (A+/Stable), will be repaid mostly with debt-funding in 2016-2017. At the same time, Beijing MTR has started its Line 16 subway investment. Fitch expects Beijing MTR's leverage to rise due to its large capex, but remain manageable, with EBITDA interest coverage of above 3x. Leverage at BCG's Tianjin Beijing Expressway Co., Ltd remains high, with an FFO-adjusted net leverage above 12x at end-2015. This has dragged down the infrastructure segment's overall credit profile. BCG is considering restructuring the segment's assets as part of its ongoing deleveraging initiative. Fitch assesses the infrastructure segment's credit profile in line with a low 'BBB' category. Moderate Government Support: BCG's ratings continue to benefit from a two-notch uplift due to its moderately strong linkage with the Beijing municipal government. BCG acts as an aggregator of private capital to be channelled towards investment in public goods, such as subways, environmental facilities and primary land development in the greater Beijing region, as well as financial services, such as government-guaranteed loans for Beijing's small-to-medium enterprises and agriculture businesses. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - the same assumptions as for BCL's rating case - Beijing MTR's revenue to increase by 40% in 2016; Line 14's CNY13bn capex to be paid off mostly by debt in 2016-2017 - BCC's revenue to drop by 10% in 2016. Capex sustained above CNY6bn in 2016-2018 RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: - holdco's land failing to generate sustainable cash inflow, so that BCG's ratio of dividend and interest income to interest expense remains below 1.2x (2015: 0.4x) - further deterioration of the credit profiles of BCG's three core subsidiaries Positive: The Negative Outlook on BCG's IDR may be revised to Stable if the above factors do not materialise within 12 months. Contact: Primary Analyst Winnie Guo Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 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 Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017498 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. 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. 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