Fitch Affirms Yuexiu Transport at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Chinese toll road operator Yuexiu Transport Infrastructure Limited's (YXT) Long-Term Foreign- and Local-Currency Issuer Default Rating (IDRs) and senior unsecured rating at 'BBB-'. The Outlook is Stable.
Simultaneously, Fitch has affirmed Famous Kind International Limited's (Famous Kind) USD1bn medium-term note (MTN) programme and its EUR200m 1.625% senior unsecured notes due 2018 at 'BBB-'. Famous Kind is wholly owned by YXT. YXT is providing a guarantee to the debt issued from Famous Kind's MTN programme.
YXT's robust and geographically diverse toll road operations across China are the major supports for its 'BBB-' IDR. YXT also receives stable and sizeable cash flows from its subsidiaries and associate investments. Fitch expects the negative financial impact from the acquisition of the Hubei Suiyuenan Expressway (HSE) to be short-lived. Fitch estimates YXT's financial metrics will recover to a level appropriate for the 'BBB-' rating between 2017 and 2018 as traffic and toll revenue grow.
KEY RATING DRIVERS
Geographically Diversified Assets: At end-2015, YXT had 13 expressways and bridges across China. Excluding the Xi'an Expressway, the concession of which is expiring in 2017, the average remaining concession life of the company's other toll roads is more than 18 years. Furthermore, the geographic diversity of its assets provides protection against any adverse developments in traffic or toll standards within a particular area. Performance of the assets has been generally robust. Traffic volume at YXT's expressway subsidiaries increased by 7% in 2015 despite China's slower economic growth; while the change to charging toll by vehicle weight increased YXT's average toll rate received during 2015. In aggregate, YXT's toll revenue increased by around 20% in 2015 to CNY2.2bn.
Short-Term Impact from Acquisition: YXT's leverage, measured by FFO-adjusted net leverage increased to 5.9x in 2015 from 3.0x in 2014 due to the acquisition of HSE. We expect leverage to gradually return to below the negative rating guideline of 5.5x between 2017 and 2018, barring any additional major acquisition. The recovery in leverage is slower than Fitch initially anticipated due to slower economic growth in China, which partly offset the continued growth in car ownership.
Plan to Cut Priority Debt: Fitch estimates the HSE acquisition has pushed YXT's total priority debt at the project-company level to more than 3x its consolidated EBITDA. However, Fitch recognises this sharp increase arises from the large secured indebtedness at the HSE level, rather than addition of secured debt at the YXT level; implying that the ratio of secured debt to EBITDA for YXT - excluding HSE's secured debt and EBITDA - would be less than 3x. Furthermore, the company plans to reduce the priority debt via internal cash generation and refinancing.
YXT has the necessary financial resources to carry out the plan, and a good track record of reducing priority debt from 2012 to 2014. In addition, Fitch expects the cash generation from YXT's lower-leveraged expressways and dividends from associate companies to comfortably cover its interest payments at the holding company. As such, Fitch is maintaining YXT senior unsecured ratings at the same level as its IDR.
Linkage with Parent: YXT has been operating quite independently from its parent, Guangzhou Yuexiu Group, which owns 60.65% of YXT. Guangzhou Yuexiu Group is wholly owned by the Guangzhou State-owned Assets Supervision and Administration Commission. The rating of YXT does not incorporate any explicit support from its parent company, although YXT does enjoy advantages, such as good access to domestic banks, from being ultimately majority owned by the Guangzhou SASAC and being an important subsidiary of the Guangzhou Yuexiu Group.
Fitch's key assumptions within our rating case for the issuer include:
- Traffic volume of the company's expressways to grow annually by mid-single digit percentage on average from 2016 to 2018.
- Average toll level to remain stable
- Dividend payout to cash flow generated to remain stable
- No significant acquisitions
Positive: Future developments that may collectively or individually lead to positive rating actions include:
- Improvement in FFO-adjusted net leverage to less than 3x on a sustained basis, provided there is no deterioration in the level of structural subordination of creditors at the company level
Negative: Future developments that may collectively or individually lead to negative rating actions include:
- Sustained deterioration in the business profile, including material adverse regulatory developments
- Weakening of FFO-adjusted net leverage to over 5.5x on a sustained basis, which could arise due to further large debt-funded investments or material increase in dividends and other financial support to related companies