OREANDA-NEWS. Fitch Ratings has assigned Xuzhou Economic and Technology Development Zone State-owned Assets Management Co., Ltd. (XETZ) Long-Term Foreign - and Local-Currency Issuer Default Rating (IDR) of 'BB+' with a Stable Outlook.

Fitch has also assigned XETZ's proposed senior unsecured US dollar notes an expected rating of 'BB+(EXP)'. The offshore notes will be issued by Xuzhou Economic and Technology Development Zone International Investment Co., Ltd., which is a direct, wholly owned subsidiary of XETZ. XETZ will provide an unconditional and irrevocable guarantee to the proposed notes. The proceeds will be used for general corporate purposes.

The final ratings on the proposed US dollar notes are contingent upon the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

Links to Xuzhou Municipality: The ratings of XETZ are credit linked to but not equalised with Fitch's internal assessment of Xuzhou Municipality. This is reflected in 100% state ownership, strong government control and oversight, and strategic importance of the entity's operation to the municipality. These factors result in a high likelihood of extraordinary support, if needed, from the municipality. Therefore, XETZ is classified as a credit-linked public-sector entity under Fitch Ratings' criteria.

Xuzhou's Healthy Creditworthiness: Xuzhou, located in eastern China, has a budget performance that is widely considered satisfactory and has a diversified socio-economic profile. Xuzhou's gross regional product (GRP) is the 5th-largest among all 13 prefectures in Jiangsu Province whose GRP, in turn, is the second-largest among all provinces in China. The strengths are partially mitigated by potentially high contingent liabilities arising from its state-owned entities.

Legal Status Attribute Mid-Range: XETZ, which was established in 1992, is a wholly state-owned limited liability company under China's Company Law. Under this legal status, major decisions of the company would require verification and approval from the government. The government has no plan to dilute its shareholding in XETZ.

Strategic Importance to Municipality: XETZ is one of the urban development companies in Xuzhou Municipality and is the sole investment and financing platform in the municipal government's flagship economic and technology development zone - Xuzhou Economic and Technology Development Zone (Xuzhou ETDZ). The company has been designated to develop large-scale urban infrastructure projects in Xuzhou ETDZ, provide ancillary services and invite investment in the zone. XETZ is integral to the zone and plays an important role in implementing the blueprint of the Xuzhou municipal government and Xuzhou ETDZ Management Committee. Fitch assesses XETZ's Strategic Importance attribute as Mid-Range.

Tangible Government Fiscal Support: The municipal government has provided significant capital injections, subsidies and purchase of government services to monetarily support XETZ's business. The fiscal support aims to partly fund XETZ's capital expenditure and debt servicing. As a result, Fitch considers XETZ as a core functional public-service entity in Xuzhou and its integration into the municipal government's budget to be in the mid-range.

Government Control and Supervision: The board members of XETZ are mainly appointed by the government, and major projects require the government's approval. XETZ's financing plan and debt levels are closely monitored by the government, and the company is required to report its operational and financial results to the government on a regular basis. The Control attribute is assessed at Stronger.

Weak Standalone Profile: XETZ's financial profile in the past five years was characterised by large capex, negative free cash flow and high leverage. Fitch believes this trend will continue in the medium term, driven by the ongoing infrastructure investments in Xuzhou ETDZ. An extended settlement period after the completion of projects and sizeable account receivables due from Xuzhou ETDZ's finance department would further constrain XETZ's liquidity position.

RATING SENSITIVITIES

An upgrade of Fitch's internal assessment on Xuzhou Municipality as well as a stronger or more explicit commitment of support from the municipality may trigger positive rating action on XETZ. A significant weakening XETZ's strategic importance to the municipality, dilution of the municipal government's shareholding, and/or reduced municipality support, may result in a downgrade.

A downgrade may also stem from weaker fiscal performance or increased indebtedness of the municipality, leading to deterioration to Fitch's assessment of is creditworthiness.

A rating action on XETZ would also lead to a similar action of the proposed US dollar notes.