OREANDA-NEWS. April 27, 2015. Fitch Ratings has published Chinese toll road operator Yuexiu Transport Infrastructure Limited's (YTI) Long-Term Issuer Default Rating (IDR) of 'BBB-'. The Outlook is Stable.

Fitch has also assigned Famous Kind International Limited's USD1bn medium-term note (MTN) programme a rating of 'BBB-' and the proposed euro senior unsecured notes issued under the MTN programme an expected rating of 'BBB-(EXP)'. Famous Kind is wholly owned by YTI. Notes issued under the MTN programme may be in any currency or of any tenor, and will be senior unsecured obligations of Famous Kind and YTI, which is providing a guarantee to the debt issued from the MTN programme

The proceeds of the proposed euro notes issued will be used primarily to optimise the current debt structure and general corporate purposes. The final rating on the euro notes are contingent upon the receipt of final documents conforming to information already received.

YTI's robust and geographically diverse toll road operations across China are the major supports for its 'BBB-' IDR. YTI also receives stable and sizeable cash flows from its subsidiaries and associate investments. Fitch expects the negative financial impact from the ongoing acquisition of Hubei Suiyuenan Expressway (HSE) to be short-lived. With traffic and toll revenue growth, Fitch estimates YTI's financial metrics to recover to a level appropriate for the 'BBB-' rating from 2016.

KEY RATING DRIVERS

Geographically Diversified Assets: YTI has 13 expressway, bridge and port assets across seven provinces in China (not including HSE). The geographic diversity provides protection against any adverse developments in traffic or toll standards within a particular area. Performance of the assets has been generally robust. The company's toll revenue rose by an average 13% per year in the past five years due to traffic growth and acquisitions.

Short-Term Impact from Acquisition: The payment and debt assumed for acquiring HSE, mainly to replace the Xi'an Expressway concession that expires in 2016, will weaken YTI's financial metrics in the short term. Fitch estimates FFO adjusted net leverage will peak around 6.3x in 2015 from 3.0x in 2014. However, leverage is likely to improve from 2016 to below 5x in 2017-18 with contribution from HSE and assuming no other material acquisitions. The concessions for YTI's other assets (aside from Xi'an Expressway) are well beyond 10 years, so the company will have no need to buy assets in the medium term to maintain scale.

Plan to Cut Priority Debt: Fitch estimates that the HSE acquisition will push YTI's total priority debt at the project company level to more than three times its consolidated EBITDA. However, the company has a solid plan to reduce the priority debt via internal cash generation and refinancing. YTI has the necessary financial resources to carry out the plan, and a good track record of reducing priority debt from 2012 to 2014. In addition, Fitch expects the cash generation from YTI's lower-leveraged expressways and dividends from associate companies to comfortably cover its interest payments at the holding company.

Linkage with Parent: YTI has been operating quite independently from the parent company - Guangzhou Yuexiu Group, which owns 60.65% of YTI. Guangzhou Yuexiu Group is wholly owned by the Guangzhou State-owned Assets Supervision and Administration Commission. The rating of YTI does not incorporate any explicit support from its parent company, although YTI does enjoy advantages, such as good access to domestic banks, from being ultimately majority owned by the Guangzhou SASAC and being an important subsidiary of the Guangzhou Yuexiu Group.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Traffic volume of the company's expressway to grow at 5% a year on average from 2015 to 2017.
- Average toll level to remain stable
- Dividend payout ratio to remain stable at around 60%
- Acquisition of HSE to be completed in 2015; no further acquisitions before 2018

RATING SENSITIVITIES

Positive: Future developments that may collectively or individually lead to positive rating actions include:
- Improvement in FFO adjusted net leverage to less than 3x on a sustained basis, provided there is no deterioration in the level of structural subordination of creditors at the company level

Negative: Future developments that may collectively or individually lead to negative rating actions include:
- Sustained deterioration of in the business profile, including material adverse regulatory developments
- Weakening of FFO adjusted net leverage to over 5.5x on a sustained basis, which could arise due to further large debt-funded investments and/or material increase of dividends and other financial support to related companies