S&P: Jiangsu New Headline Development Group Co. Ltd. And HK Zhiyuan Group Ltd. Outlooks Revised To Negative; Ratings Affirmed
In addition, we revised our rating outlook on HK Zhiyuan Group Ltd. (Zhiyuan) to negative from stable. At the same time, we affirmed our 'BB' long-term corporate credit rating on Zhiyuan. In line with the outlook revision, we lowered our long-term Greater China regional scale rating on Zhiyuan to 'cnBB+' from 'cnBBB-'.
We also lowered our long-term Greater China regional scale rating on the U. S. dollar-denominated senior unsecured notes issued by ZHIYUAN Group (BVI) Co. Ltd., a special purpose vehicle, to 'cnBB+' from 'cnBBB-'. Zhiyuan unconditionally and irrevocably guarantees the notes. At the same time, we affirmed the 'BB' long-term issue rating on the notes.
NHL is a construction services provider and one of the largest financing and investment companies of the Lianyungang municipal government. Zhiyuan is NHL's fully owned subsidiary, primarily positioned as the group's sole funding vehicle offshore.
We revised the outlooks on NHL and Zhiyuan because we believe the credit quality of the Lianyungang municipal government has weakened; the government owns 100% of NHL. In our view, Lianyungang's financial capacity to provide extraordinary support to NHL, if required, is likely to diminish further over the next 12 months.
Lianyungang's debt burden and contingent liabilities are likely to increasingly strain the municipal's credit quality, in our view. The city is exposed to traditional sectors such as salt production and steel that have overcapacity issues. In the first half of 2016, economic growth slowed considerably, placing substantial pressure on the municipal's budgetary performance.
We expect the government's tax-supported debt to rise to around 200% of its operating revenues in 2018 from our estimate of 140% at year-end 2015. Our view is based on the economic slowdown, which has hampered previous double-digit fiscal revenue growth and made countercyclical spending more necessary.
The rating on NHL reflects the credit profile of the Lianyungang government. In our opinion, NHL has an extremely high likelihood of receiving timely and sufficient extraordinary government support if it comes under financial stress. The rating on NHL is four notches above the company's stand-alone credit profile (SACP) of 'b'.
Our assessment of extraordinary government support reflects the following characteristics of NHL:
Very important role to the government. NHL undertakes construction services on behalf of the Lianyungang government and develops infrastructure projects on a build-and-transfer basis, particularly for the Lianyungang Economic and Technological Development Zone, an important economic region for the city. Integral link with the government. The municipal government owns 100% of NHL, and we do not expect it to reduce its stake because the company will continue to undertake a public service for the government. We believe the severability of non-government debt from government debt is limited. The negative outlook on NHL reflects our view on the Lianyungang municipal government. At the same time, we continue to see an extremely high likelihood that the company will receive extraordinary support from the government over the next 12 months.
The negative outlook on Zhiyuan reflects the outlook on NHL and our view that Zhiyuan will remain highly strategic to its parent over the next 12 months. The rating on Zhiyuan will move in tandem with the rating on NHL (with a one-notch differential) unless we reassess Zhiyuan's group status.
We could lower the rating on NHL and Zhiyuan if we believe the creditworthiness of the Lianyungang government will further deteriorate. The ratings on NHL and Zhiyuan may be lowered if the city's tax-supported debt continues to grow significantly faster than operating revenues. We anticipate such a scenario should the government embark on large-scale stimulus spending while supply-side reforms in Lianyungang's manufacturing sector continue without an improvement in economic growth. In such a scenario, the municipal's debt ratios will likely exceed 270% of operating revenues.
Alternatively, we could lower the ratings on NHL if we believe the likelihood of extraordinary government support has materially diminished.
We could revise our outlook on NHL and Zhiyuan to stable if we believe the creditworthiness of the Lianyungang government has significantly improved. This could occur if Lianyungang mitigates its debt burden by containing its tax-supported debt growth, operating revenues pick up through further economic growth, and reforms in its state-owned enterprise sector result in lower contingent liabilities.