Fitch Assigns Jiangsu Fang Yang Group 'BB' Rating; Outlook Stable
At the same time, Fitch has assigned Fang Yang's proposed senior unsecured US dollar notes an expected rating of 'BB(EXP)'. The notes will be issued by Haichuan International Investment Co., Ltd. and will be unconditionally and irrevocably guaranteed by Fang Yang Commerce Trade Company Limited (FYCT), a wholly owned subsidiary of Fang Yang. The notes will be senior unsecured obligations of FYCT and also rank pari passu with all other obligations of FYCT.
In place of a guarantee, Fang Yang has granted a keepwell and liquidity support deed and a deed of equity interest purchase undertaking to ensure that FYCT has sufficient assets and liquidity to meet its obligations under the guarantee for the notes.
The notes are rated at the same level as Fang Yang's IDR, given the strong link between Fang Yang and FYCT and because the keepwell and liquidity support deed and deed of equity interest purchase undertaking transfer the ultimate responsibility of payment to Fang Yang.
In Fitch's opinion, both the keepwell and liquidity support deed and the deed of equity interest purchase undertaking signal a strong intention from Fang Yang to ensure that FYCT has sufficient funds to honour the debt obligations. The agency also believes Fang Yang intends to maintain its reputation and credit profile in the international offshore market, and is unlikely to default on its offshore obligations. Additionally, a default by FYCT could have significant negative repercussions on Fang Yang for any future offshore funding.
The final rating on the proposed US dollar notes is contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Links to Lianyungang Municipality: The ratings of Fang Yang are credit linked to, but not equalised with, Fitch's assessment of the creditworthiness of Lianyungang Municipality. This is reflected in 100% state ownership and the strategic importance of the entity's operation to the municipality. These factors result in a high likelihood of extraordinary support, if needed. Therefore, Fang Yang is classified as a credit-linked public-sector entity under Fitch's criteria.
Modest Credit Profile of Lianyungang: Lianyungang registered an economic growth of 10% in 2015, higher than both the national average of 6.9% and that of Jiangsu province at 8.5%. However, Lianyungang ranked 12th out of 13 prefecture level municipalities in Jiangsu province in terms of Gross Regional Product.
Strategic Importance Attribute Midrange: Fang Yang is integrated into the National East-Central-West Regional Cooperation Demonstration Region in Lianyungang Xuwei New District (XND). Fang Yang plays an important role in implementing the blueprint of the Lianyungang municipal government and the central government for the district. It is the sole entity involved in developing large-scale infrastructure projects, building affordable housing and providing ancillary services to resident companies in the XND.
Government Integration Attribute Midrange: Fang Yang has received government subsidies and grants of CNY1.7bn since 2009. Both the Lianyungang municipal government and Lianyungang XND Management Committee have pledged to continue support to Fang Yang to ease debt-servicing pressure, enhance financial flexibility and support Fang Yang's capital expenditure in urban infrastructure development.
Control Attribute Midrange: Board members are appointed mainly by the Lianyungang municipal government, and major projects require the municipal government's approval. Fang Yang's financing plan and debt levels are closely monitored by the municipality, and the company is required to report its operational and financial results to the municipality and Lianyungang XND Management Committee on a regular basis.
Weak Financial Profile: As a public-sector entity, Fang Yang incurred large capex, negative free cash flow and high leverage over the past three years. Large and rising account receivables from contracts with government entities may affect Fang Yang's liquidity and project completion. At end-2015, account receivables represented 31.1% of its current assets, jumping from 24.6% in end-2013.
An upgrade of Fitch's credit view on Lianyungang Municipality, as well as a stronger and/or more explicit support commitment from the municipality, may trigger positive rating action on Fang Yang.
Significant weakening of Fang Yang's strategic importance to the municipality, dilution of the municipality's shareholding to below 75%, and/or reduced explicit and implicit municipality support, may result in a downgrade. A downgrade could also stem from weaker fiscal performance or increased indebtedness of the municipality, leading to a deterioration of the municipality's budgetary performance.
A rating action on Fang Yang would also lead to similar action on the rating on the proposed US dollar notes.