Fitch Assigns Beijing Capital Group's Guaranteed Notes Final 'BBB' Rating
The notes are rated in line with BCG's senior unsecured rating as they are unconditionally and irrevocably guaranteed by the company.
The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 20 March 2015.
BCG's ratings benefit from a two-notch uplift that reflects its moderately strong operational and strategic linkage with the Beijing municipal government. BCG acts as an aggregator of private capital to be channelled towards investments in public goods like subways, environmental facilities, primary land development in the greater Beijing region, and financial services like government-guaranteed loans for SMEs and agriculture businesses in Beijing.
KEY RATING DRIVERS
Standalone at 'BB+': BCG's standalone 'BB+' ratings are derived from the weighted average credit profiles of its three key business divisions - infrastructure, environment protection, and real estate. The presence of substantial minority interests in its key subsidiaries - Beijing MTR Co. Ltd in subway operation, Beijing Capital Co., Ltd. in waterworks, and Beijing Capital Land Ltd. (BB/Stable) in property - makes its access to cash flows of these subsidiaries structurally subordinated to their creditors.
However, the aforementioned subordination can be strongly offset by BCG's diversified business operations and large wholly owned asset pool that is a result of injection by the Beijing State-owned Assets Supervision and Administration Commission (SASAC) of its wholly-owned Capital Jingzhong (Tianjin) Investment Company Limited, which owns a large land bank, into BCG. Furthermore, Fitch expects the ratio of the dividends BCG receives to interest to gradually improve to 1.1x in 2015 and further to 1.4x in 2016. The dividends and interest income will be able to fully cover its cash interest expenses from 2015 onwards.
Growing Recurring Income from Infrastructure: The infrastructure segment is backed by a strong metro operation that is expanding its investment in line 14(BJ). The expressway business is highly leveraged but this does not lead to any material stress because it is deleveraging and generating positive free cash flow. Fitch expected the segment's EBITDA to interest coverage to improve to 3.2x in 2014 from 2.7x in 2013.
Capex Pressures Waterworks: Beijing Capital Co., Ltd.'s businesses in supplying water and sewage treatment to local governments are contractually protected. However, its credit profile is constrained by high leverage due to elevated capex. Fitch expects its coverage ratios to weaken in the medium term with FFO net leverage to stabilise at around 4.0-4.5x (end-2013: 3.9x) and FFO fixed charge coverage to hover around 2.0-2.5x (end-2013: 4.2x).
High Property Leverage Constrains Ratings: Beijing Capital Land Ltd. has high leverage as a result of substantial land acquisitions that entailed land premium totalling CNY9.6bn in 1H14 (CNY11.7bn in 2013), which constrains its profile despite possible continued sales expansion.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue to increase by more than 20% from 2014 to 2016;
- EBITDA margin to remain stable and improve from 2016 with the share of higher-margin utility type earnings increasing;
- capex for the group to continue on the historical trend;
- dividend payout ratios of subsidiaries remain unchanged.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Material strengthening of the credit profiles of its three core divisions
- Any signs of strengthening linkage with the Beijing government
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- BCG's dividend and interest income to interest expense coverage falls below 1.2x from 2016 (0.75x expected for 2014)
- Failure of Capital Jinzhong to expand its business
- Material weakening of the credit profiles of its three core divisions
- Any signs of weakening linkage with the Beijing government.
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