OREANDA-NEWS. Fitch Ratings has assigned Huai'an Development Holdings Co., Ltd (HAD) Long-Term Foreign - and Local-Currency Issuer Default Ratings (IDR) of 'BB+'. The Outlook is Stable.

Fitch has also assigned HAD's proposed senior unsecured US dollar notes an expected rating of 'BB+(EXP)'. The net proceeds of the proposed issue will be used for HAD's general corporate purposes.

The notes will be issued by Xiangyu Investment (BVI) Co., Ltd. (Xiangyu Investment), and are unconditionally and irrevocably guaranteed by Hong Kong Xiangyu Investment Group Co., Limited, a wholly owned subsidiary of HAD. The notes will be senior unsecured obligations of Xiangyu Investment and rank pari passu with all of its other senior unsecured obligations.

At the same time, HAD has granted a keepwell and liquidity support deed and a deed of equity interest purchase undertaking to ensure Xiangyu Investment has sufficient assets and liquidity to meet its obligations under the guarantee for the notes.

The notes are rated at the same level as HAD's IDRs, given the strong link between Xiangyu Investment and HAD, and because the keepwell and liquidity support deed and deed of equity interest purchase undertaking transfer the ultimate responsibility of payment to HAD.

In Fitch's opinion, both the keepwell and liquidity support deed and the deed of equity interest purchase undertaking signal a strong intention from HAD to ensure that Xiangyu Investment has sufficient funds to honour the debt obligations. The agency also believes HAD 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 Xiangyu Investment could have significant negative repercussions on HAD for any future offshore funding.

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

Huai'an Municipality's Healthy Creditworthiness: Huai'an, located in Jiangsu province, has a budget performance that is widely considered satisfactory and has a diversified socio-economic profile. Huai'an's gross regional product (GRP) growth rate is higher than the national average, and its budgetary performance improved over the last decade. The strengths are partly offset by potentially high contingent liabilities arising from its public-sector entities.

Legal Status Attribute Mid-Range: HAD is registered as a wholly state-owned limited liability company under the Chinese Company Law. Huai'an Municipality has full control over HAD. The Huai'an Economic and Technology Development Zone (HAETZ) Management Committee supervises HAD on behalf of Huai'an municipality in daily operational matters. The government has no plan to dilute its shareholding in HAD.

Strategic Importance Attribute Mid-Range: HAD is one of the urban development companies in Huai'an Municipality and is the sole investment and financing platform in the municipal government's flagship economic and technology development zone, the HAETZ. The company has been designated to develop large-scale urban infrastructure projects in the zone. HAD is integral to the zone and plays an important role in implementing the blueprint of the municipal government for the zone.

Government Integration Attribute Mid-Range: The company's financials are not consolidated into the government budget, but the government has provided significant capital injections, subsidies and purchase of government services to support HAD's business. The subsidies accounted for 11% of HAD's revenue in 2015, government infrastructure projects contributed 78% to its total revenue, according to Fitch's calculation, and the majority of the company's receivables are directly or indirectly due from government. The government said it will continue to provide fiscal support to partly fund HAD's capital expenditure and debt servicing.

Government Control Attribute Stronger: The board members of HAD are mainly appointed by the government, and major projects require the government's approval. HAD'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: HAD had large capex, negative free cash flow and high leverage in the past five years. Fitch believes this trend will continue in the medium term, driven by ongoing infrastructure investments in the economic and technology zone. An extended settlement period after the completion of projects and sizeable account receivables due from HAETZ's finance department would further constrain HAD's liquidity position.

RATING SENSITIVITIES

An upgrade of Fitch's internal assessment on Huai'an Municipality as well as a stronger or more explicit commitment of support from the municipality may trigger positive rating action on HAD. A significant weakening HAD'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 HAD would also lead to a similar action of the proposed US dollar notes.