OREANDA-NEWS. Fitch Ratings has assigned China-based Yunnan Metropolitan Construction Investment Group Co., Ltd.'s (YMCI) USD500m 3.125% senior unsecured notes due 2019 a final rating of 'BBB+'.

The assignment of the final ratings follows the receipt of documents conforming to information already received. The final ratings are in line with the expected ratings assigned on 21 June 2016.

The notes were issued in the offshore market and by YMCI's wholly owned subsidiary, Caiyun International Investment Limited (CII). YMCI is providing an unconditional and irrevocable guarantee to the proposed notes. The notes will be senior unsecured obligations of YMCI and rank pari passu with all other obligations of YMCI. The proceeds will be used by YMCI for general corporate purposes.

KEY RATING DRIVERS

Links to Yunnan Province: YMCI's ratings are credit linked to but not equalised with those of Yunnan province because of its strategic importance to the provincial government. It is 100% owned by the provincial government and the province closely oversees its finances. There is a strong likelihood of extraordinary support from the province, if needed. Therefore, YMCI is classified as a credit-linked public-sector entity under Fitch's criteria.

Legal Status Attribute Mid-Range: YMCI, which was established in 2005, 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.

Strategic Importance to Yunnan: YMCI is the Yunnan government's largest platform for urban and tourism infrastructure development and financing It is the backbone of the province's effort to monetise its abundant tourism resources and develop urban infrastructure. In addition, YMCI is the only provincial level platform for managing the land reserve, reflecting YMCI's expertise in this area. The lack of competing platforms and YMCI's competence demonstrates the close linkage between YMCI and Yunnan's provincial government. As a result, Fitch assesses YMCI's Strategic Importance attribute as Mid-Range.

Solid Track Record of Support: Yunnan's provincial government injected approximately CNY8.8bn into YMCI through subsidies, capital injections and asset transfers between 2008 and 2015. YMCI says the government will inject another roughly CNY2.2bn in 2016. YMCI also receives preferred access to land at favourable prices around the non-commercial projects that it has developed. Fitch expects government support in various forms will continue as YMCI shoulders an increasing amount of non-commercial public service mandates, such as in social housing and water works. As a result, Fitch considers YMCI as a core functional public-service entity in Yunnan and its integration into the provincial government's budget to be in the Mid-range.

Government Control and Supervision: The Yunnan government is the ultimate shareholder of YMCI. The Yunnan State-owned Assets Supervision and Administration Commission (SASAC) ensures YMCI meets the province's goal of developing large-scale urban and tourism infrastructure by appointing all the members of YMCI's board of directors, except an employee representative. Yunnan SASAC approves YMCI's major investment decisions. The company's borrowings need the Yunnan SASAC's approval and its liabilities are closely monitored by the authority. The Control attribute is assessed at Stronger.

Commercial Complements Non-Commercial: YMCI operates a sizeable commercial and residential property business, which accounted for approximately 17% of revenue and approximately 12% of gross profit in 2015. This business generates cash flows and profits that offset losses in the company's non-commercial, public-service projects. YMCI is also able to use expertise gained from its property business in the non-commercial projects.

Shift from Pure Financing Platform: By entering into new public-service businesses lines, YMCI offers the Yunnan provincial government more than just financing, a move that is encouraged by the central government.

Weak Standalone Credit Profile: YMCI aims to maximise profit in its commercial segment while offering the best financing and execution in its government-mandated projects. The standalone credit profile of YMCI is in the highly speculative category, because of the combination of high leverage, low coverage ratio and negative cash flow.

RATING SENSIVITIES

An upgrade of Fitch's internal credit assessment of Yunnan province as well as stronger or more explicit provincial support for the company may trigger a positive rating action on YMCI.

Significant weakening of YMCI's strategic importance to the province, dilution of the province's direct and indirect shareholding below 75%, and/or reduced explicit and implicit provincial support, may result in a downgrade. A downgrade could also stem from a weaker fiscal performance or increased indebtedness of the province that could lead to deterioration in the sponsor's creditworthiness.

A rating action on YMCI would also lead to a similar action on the US dollar notes.