OREANDA-NEWS. Fitch Ratings has assigned Xi'an Municipal Infrastructure Construction Investment Group Corporation, Ltd.'s (XICI, BBB/Stable) USD500m 2.800% senior unsecured bond due 2019 final rating of 'BBB'.

The bond is issued directly by XICI and is rated at the same level as the entity's Issuer Default Rating. The bonds will constitute direct, unconditional, unsubordinated and unsecured obligations of XICI and rank pari passu with all of the company's other obligations.

The assignment of the final rating follows the receipt of documents conforming to information already received. The final ratings are in line with the expected ratings assigned on 30 August 2016. The net proceeds will be used for general corporate purposes.

KEY RATING DRIVERS

Linked to Xi'an Municipality: The ratings of XICI are credit-linked to, but not equalised with, Fitch's assessment of the creditworthiness of Xi'an Municipality. The link reflects strong government control and oversight of XICI, the company's integration with the government budget, strategic importance of XICI, and moderate legal ties with the municipality. These factors result in a high likelihood of extraordinary support, if needed, from the municipality. Therefore, XICI is classified as a credit-linked public-sector entity under Fitch's criteria.

Xi'an's Creditworthiness: Xi'an Municipality's gross regional product (GRP) growth rate in the last three years was above the national growth rate. Its GRP was also above the average of China's 32 provincial capital cities and semi-provincial cities. Xi'an Municipality's debt is high, but the risks are mitigated by growing fiscal performance, and significant profits from and marketable shares in its state-owned enterprises.

Strategic Importance Attribute Stronger: XICI is the largest public sector entity and the primary public service provider in Xi'an Municipality. It is the leading distributor of piped gas in Xi'an, with exclusive distribution rights in four districts and parts of two other districts in the city's 10 districts. It also controls about 75% of Xi'an's heat supply market and approximately 30% of the gas stations in Xi'an. XICI also supports the provision of 70% of Xi'an public transportation.

Control Attribute Stronger: XICI is controlled directly by Xi'an Municipality. XICI's financing plan and debt level are approved and closely monitored by the government. Also, XICI is requested to report its budget performance on a regular basis. Its board members, except for employee representatives, are all appointed by the government.

Government Integration Attribute Stronger: XICI expects about CNY18.4bn of debt to be replaced by municipal bonds issued by the Xi'an Municipality in 2016 - a significant share of which is consolidated in the government's accounts. By end-July 2016, about CNY4bn of debt has been replaced under this arrangement. In addition, XICI has been receiving fiscal support from the government, such as debt repayment reserve, subsidies and project funding, to support XICI's role in providing public transportation services and public infrastructure construction. Such subsidies amounted to CNY3bn in 2013, CNY4bn in 2014 and CNY5bn in 2015.

Weak Standalone Entity Profile: In the past five years, XICI's has made large opex and capex, resulting in negative free cash flow and high leverage. Its ratio of gross debt to EBITDA was 25x-30x in the past three years. Fitch believes this trend will continue in the medium to long term, driven by continued infrastructure investments. The weak standalone credit profile is mitigated by its strong strategic links with the government and the related monetary and non-monetary government support.

RATING SENSITIVITIES

Linkage With Xi'an Municipality: A stronger or more explicit support commitment from Xi'an Municipality may trigger a positive rating action on XICI. Significant reduction of XICI's strategic importance, a dilution in government shareholding, and/or reduced government support, could result in a downgrade.

Creditworthiness of Xi'an Municipality: An upgrade of Fitch's internal credit view on Xi'an Municipality may trigger a positive rating action on XICI. Negative rating action on XICI could derive from deterioration in the credit profile of Xi'an Municipality, which could lower Fitch's internal assessment of the municipality's creditworthiness.

A rating action on XICI would lead to similar action on the rating on the proposed US dollar bond.