OREANDA-NEWS. Fitch Ratings has assigned China-based toll-road operator Shenzhen Expressway Company Limited's (SZE, BBB/Stable) USD300m 2.875% bonds due 2021 final ratings of 'BBB'.

The bonds are rated at the same level as SZE's Long-Term Foreign-Currency Issuer Default Rating (IDR) because they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

The final rating follows a review of final documentation materially conforming to the draft documentation previously reviewed. The final ratings are same as the expected ratings assigned on 5 July 2016.

The company plans to use most of the proceeds from the bond to repay debt and for general corporate purposes, including financing the Shenzhen Outer Ring Road Project, potential acquisitions and investment opportunities. Fitch does not expect the financial profile of the company to change significantly over 2017-2019 after taking into account the proceeds from the bond issue.

SZE is 50.9% owned by Shenzhen International Holdings Limited (SIH, BBB/Stable), which is in turn 43.73% owned by the Shenzhen State-owned Assets Supervision and Administration Commission. SZE's robust toll-road operations, strong balance sheet and expected stability in the regulatory environment support its 'BBB' IDR. Fitch views the company's investment in the property market as broadly neutral to its credit profile and we believe the company is not likely to aggressively expand its non-toll road operations.

KEY RATING DRIVERS

Robust Regional Expressway Operator: SZE is Shenzhen city's leading expressway operator with a total of 16 expressway and bridge assets that have equity-based mileage of 416 kilometres (JVs and associates included). Eight of these expressways are within Shenzhen and account for the majority of the city's expressways by mileage. Traffic growth was robust in the past five years, rising 13% in 2015.

Fitch expects traffic growth to be driven by the region's diverse economy and increasing vehicle ownership. However, the average toll may be under slight pressure due to the slower growth of commercial-vehicle tolls from slower economic expansion.

Unsustainable Improvement in Financial Profile: In 2015, SZE received a large non-recurring compensation of CNY6.58bn from the Shenzhen government for removing tolls on the Yanba, Yanpai and Nanguang Expressways. The company's credit metrics will benefit from the compensation in the short term. We expect the company to have substantial capex in the next three years to invest in existing projects - Shenzhen Outer Ring Road Project and Meilin Checkpoint Urban Renewable (MCUR) Project. In addition, the company is also looking to acquire brownfield toll road and property projects, and explore new business opportunities.

Factoring in only the Shenzhen Outer Ring Road Project and MCUR project in the capex, Fitch expects SZE's FFO-adjusted net leverage to remain below 2.0x and FFO fixed-charge coverage to be maintained above 4.0x in 2016-2019. Any new investments - depending on size, profitability and financing arrangements - could heavily impact its key credit metrics.

Stable Regulatory Environment: SZE's management does not expect the Shenzhen government to make large-scale expressway acquisitions from the company. Should the Shenzhen government remove tolls on the majority on SZE's expressways, this will create uncertainties for SZE's long-term business profile, even though the company receives compensation.

In general, the regulatory environment for expressway operators in China is relatively stable after significant toll-road tariff standard cuts and policies that reduced revenue, such as Toll-Free Scheme on Holidays and Green Passage Toll-Free Policy (toll exemption for certain food transporting vehicles), came into effect in the last four to five years. Those changes, which discouraged private-sector expressway investment, and the traffic congestion on main expressways during holidays are likely to deter regulators from making further changes that are adverse for the operators.

Limited Downside from Property: The company has invested in several property projects related to its expressway operations, including the MCUR Project and Guilong Project. In Fitch's view, these two projects are opportunistic and have limited downside risks because the company acquired the land at a significant discount to the market price. We do not expect the company to aggressively expand its property investment in the future.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for SZE include:

- Traffic volume to grow by 10% in 2016 and 5% a year in 2017-2019

- Average toll per vehicle to drop 5% in 2016 due to change in traffic mix and remain flat in 2017-2019

- Annual capex, representing mainly the Shenzhen Outer Ring Road Project and MCUR projects, of CNY1.0bn in 2016, CNY2.6bn in 2017, CNY2.3bn in 2018 and CNY502m in 2019

- The government will buy back three expressways - Yanba Expressway, Yanpai Expressway and Nanguang Expressway - at end-2018;

- Fitch to incorporate profits from the Interlaken Town Project starting from 2016 into our forecast

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Sustainable scale of the expressway business with no material increase in business risk from its non-expressway operations;

- strong financing profile, with FFO interest coverage above 6.0x (4.0x at end-2015) and FFO-adjusted net leverage below 2.0x (0.3x at end-2015) , provided its majority shareholder SIH's ratings also improve

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Sustained weakening of the company's financial profile, with FFO interest coverage below 3x and FFO-adjusted net leverage above 4.5x.

- Material negative regulatory change in the expressway sector that substantially weakens the company's cash generation

- Repeated engagement in property projects that would compromise the company's current business model

- A lowering of SIH's ratings