S&P: Jinan West City Investment and Development Group Rated 'BBB-', Outlook Stable; Proposed Notes Rated 'BBB-'
The issue rating is subject to our review of the final issuance documentation. We expect JNWC to use the issuance proceeds for general corporate purposes.
JNWC is a China-based local government investment and financing platform (LGFV) in Jinan, the capital city of Shandong province. By asset, it is the largest among the four municipal-level LGFVs in Jinan.
The rating on JNWC benefits from the creditworthiness of the company's sole owner, the Jinan municipal government. In our view, there is an extremely high likelihood of timely and sufficient extraordinary government support to JNWC if the company comes under financial distress. Therefore, the corporate credit rating on JNWC is four notches above the stand-alone credit profile (SACP), which we assess as 'b+'.
Our view of an extremely high likelihood of extraordinary government support is based on JNWC's very important role and integral link with the municipal government.
"Our rating on Jinan city reflects our view of Jinan's exceptional liquidity and strong budgetary performance," said S&P Global Ratings analyst Gloria Lu. "This is against the backdrop of an evolving but unbalanced institutional framework. The city's high debt burden and very high contingent liabilities also temper this strength. The average economy and budgetary flexibility, and satisfactory financial management are neutral to the ratings."
We are relatively optimistic on Jinan's growth outlook, based on the fixed asset investments, urbanization, and service sectors. The city's infrastructure investments are growing, despite coming from a lower base. As the capital city of Shandong, China's second most populous province with the third-highest GDP, the city continues to expand and urbanize.
Jinan's continued expansion toward the city's east and west areas, and the resultant infrastructure development inevitably resulted in the expansion of LGFVs' balance sheets. This weighed on the city's high debt burden and very high contingent liabilities. These credit weaknesses are partially offset by JNWC's exceptional liquidity, which helps cover the debt services in the next 12 months.
Our assessment of JNWC's SACP reflects the company's high financial leverage, weak operating cash flow and interest coverage, and significant refinancing risk. In addition, its geographic concentration, business dependence on the local government, and exposure to land sale and property market conditions expose its revenue to high volatility. On the other hand, JNWC's exclusive development rights in WNT District, continued development opportunity, and ongoing government support moderate the above weaknesses.
In our view, JNWC's competitive position is mainly driven by its monopolistic position in the primary land development and infrastructure construction in the WNT District. The business is highly capital-intensive and essentially policy-driven. Under the government mandate, the company is also responsible for the infrastructure project construction, which, however, does not generate any revenue and represent assets for public welfare.
"We equalize the issue rating on JNWC's proposed senior unsecured notes with the corporate credit rating, reflecting the notes' insignificant structural subordination risk as indicated by a ratio of priority liabilities to consolidated assets well below the 20% threshold for investment grade notching," Ms. Lu said.
The stable outlook mainly reflects our view of the credit profile of Jinan municipal government and our assessment that the likelihood will remain extremely high for the government to provide sufficient and timely extraordinary support to JNWC if needed in the coming two years.
We could downgrade the company if: (1) the creditworthiness of Jinan municipal government has materially deteriorated; or (2) the likelihood for extraordinary government support has materially weakened because of a change in the government's strategies or priorities. Loosened management control or a significant reduction in the government's ownership could indicate declining commitment of support from the government. Heightened policy risk, which may prevent the municipal government from providing extraordinary support in a timely manner, would also trigger our downside rating review.
The rating will not move when the SACP is within the 'b' category. However, we could lower the SACP if we identify its FFO interest coverage as consistently below 1x, and its diminishing ongoing supports from the government, including suspension of land premium refund and subsidy or capital injection, and weakened liquidity could pressure the company's debt payment capability.
We could upgrade the company if, in our view, the creditworthiness of Jinan municipal government has materially improved. We could also raise the rating, if we reassess JNWC's role to the government as critical, or if its SACP improves to 'bb-', due to substantial strengthening of financial performance with significant deleverage.