Fitch Publishes Chongqing Western Modern Logistics Industry Zone Development Construction 'BBB'
At the same time, Fitch has also assigned CQWL's proposed senior unsecured US dollar notes an expected rating of 'BBB(EXP)'. The offshore notes will be issued by CQWL directly.
The proposed notes will constitute direct, unconditional, unsubordinated and senior unsecured obligations of CQWL. The net proceeds will be used for working capital and general corporate purposes.
The final ratings on the proposed US dollar notes are contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Linked to Chongqing Municipality: The ratings of CQWL are linked to, but not equalised with, Fitch's internal assessment of Chongqing Municipality's credit profile. CQWL's attributes for government control and oversight are assessed at Strong, that for legal status and integration with the government budget at Mid-Range and that for strategic importance to the municipality at Weaker. These factors result in a high likelihood of extraordinary support, if needed, from the municipality. Therefore, CQWL is classified as a credit-linked public-sector entity under Fitch's criteria.
Chongqing's Strong Creditworthiness: Chongqing Municipality's gross regional product growth rate was China's fastest in 2015. Its gross regional product on a per capita basis ranked 11th among all provincial-level local governments. The municipality's strengths of strong fiscal performance and diversified socio-economic profile are offset by high contingent liabilities arising from its state-owned entities.
Legal Status Attribute Mid-Range: CQWL is registered as a state-owned limited liability company under Chinese company law. However it is wholly-owned by Chongqing Shapingba District State-owned Asset Management Centre (Shangpingba SASAC) and overall supervised by the Chongqing municipal government.
Strategic Importance Attribute Weaker: CQWL is the sole operator, developer and manager of the Chongqing Logistics City (CLC), a national logistics hub designated to facilitate access to inland cities, connect areas along the "One Belt One Road" initiative and the Yangtze River Economic Belt, and capitalise on various resources in Chongqing. CQWL assumes government functions such as formulating and implementing policies on industrial and urban development in CLC; nonetheless both CQWL and CLC are in the early stages of development.
Control Attribute Stronger: CQWL is controlled ultimately by the Chongqing municipal government. CQWL's financing plan and debt level are closely monitored by the government. CQWL needs to report its budget performance on a regular basis. CQWL's board members, except for employee representatives, are all appointed by the government.
Integration Attribute Mid-Range: CQWL's financials are not consolidated into the government's, but the government has provided capital injections and monetary support. CQWL received capital injections of CNY2.5bn from the government during 2013-2015, covering about half of its capex in the same period. In addition, the majority of CQWL's revenue in 2015, mainly land use rights and management fees, were sourced from the city and Fitch expects this interconnectedness to remain over the medium term.
'B' Category Standalone Profile: CQWL's financial profile in the past five years was characterised by large capex, negative free cash flow and high leverage. Fitch believes this trend will continue in the medium term, driven by the ongoing infrastructure investments in CLC. The weak standalone credit profile is mitigated by its strategic links with the government.
Linkage With Municipality: A stronger or more explicit support commitment from Chongqing Municipality may trigger a positive rating action on CQWL. A significant weakening of the strategic importance of CQWL for Chongqing municipality, a diluted government shareholding, and/or reduced government support, could lead to a change of rating approach whereby CQWL could no longer be credit-linked to its sponsor.
Creditworthiness of Municipality: An upgrade of Fitch's internal credit view on Chongqing Municipality may trigger a positive rating action on CQWL. Negative rating action on CQWL could derive from a deterioration of the credit profile of Chongqing Municipality, which could lower Fitch's internal assessment of the municipality's creditworthiness.
A rating action on CQWL would lead to similar action on the rating on the proposed US dollar notes.