OREANDA-NEWS.  Fitch Ratings has assigned Anhui Transportation Holding Group Company Limited's (AHTrans; BBB+/Stable) USD300m 2.875% senior unsecured notes due 2018 a final rating of 'BBB+'.

The notes are issued by Anhui Transportation Holding Group (H.K.) Limited (AHTransHK), which is fully owned by AHTrans. In place of a guarantee, AHTrans has granted a keepwell deed, a deed of equity interest purchase undertaking, and a cross-border US dollar standby facility to ensure AHTransHK has sufficient assets and liquidity to meet its obligations under the guarantee for the proposed US dollar bond.

The bond is rated at the same level as AHTrans' Long-Term Issuer Default Rating, because the keepwell deed, a deed of equity interest purchase undertaking, and a cross-border US dollar standby facility transfer the ultimate responsibility of payment to AHTrans.

The assignment of the final rating follows a review of final documentation materially conforming to the draft documentation previously reviewed. The final rating is the same as the expected rating assigned on 29 May 2015.

KEY RATING DRIVERS
Strategically Important to Anhui: AHTrans' expressways are important parts of the logistic infrastructure of Anhui, a province that is a gateway for inland bound economic activity due to its strategic location. Anhui had the largest cargo transportation volume during the first 11 months of 2014 among China's provinces. Fitch expects Anhui to continue to develop its role as a logistics hub because manufacturers based on the coast are increasingly seeking to relocate to central China to trim costs and better serve customers.

Evolved Business Profile: AHTrans was formed through a merger between Anhui Expressway Holding Group and Anhui Transport Investment Group in 2014 under the approval of their parent, Anhui State-owned Asset Supervision and Administration Commission. At end-2014, AHTrans operated and managed 42 expressways and one national road spanning over 3,400km located in 16 cities across Anhui Province. These expressways represent 93% of the entire province's expressways. AHTrans will need to make substantial investments to further enhance the road network in the province. The company expects to complete over 700km of toll roads by end-2018.

AHTrans also has ancillary businesses, such as service stations and gas stations along the expressways, logistic operations and real estate development. Fitch expects the company to turn its focus away from its non-expressway related businesses because the merger in 2014 was aimed at improving the operating efficiencies for the province's expressways.

Strong Linkage with Parent: Anhui Province's Department of Transportation works almost exclusively with AHTrans in designing, constructing and operating the province's expressway networks. The province aims to further develop the expressway networks; Fitch expects the department to continue to work closely with AHTrans because the company has the ability and incentive to make the upfront investment during the design phase of projects, and the necessary execution capacity. Fitch expects this to translate into a continued increase in AHTran's contribution to the province's expressway networks.

Strong Tangible Support: AHTrans has received significant tangible support for its contribution to the province's expressway infrastructure. AHTrans benefits from tax refunds and dividend refunds from the Anhui government; and receives expressway construction subsidies from the central government's Ministry of Transportation. The tangible support appears as equity injections and other income in its financial statements. Fitch expects the strong level of tangible support to be maintained in the short to medium term, based on the province's targets in further enhancing its logistic infrastructure.

Strong Access to Liquidity: Fitch expects AHTrans to continue to have access to liquidity, given it is the Anhui government's the largest wholly owned enterprise and it operates an infrastructure related business.

Weak Standalone Financial Profile: FFO fixed charge cover was 1.7x in 2014 and Fitch expects this to be sustained at around 1.6x. FFO net adjusted leverage was 9.4x in 2014 and Fitch expects this to be sustained at around 11.0x. The financial metrics are largely driven by the company's elevated capex programme, which has been partially financed by a sustained high level of tangible support from the government. In terms of debt structure, AHTrans aims to use its large cash reserve to reduce its reliance on short-term borrowings.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Continued substantial tangible support from the government
- Stable vehicle traffic growth
- Maintaining overall operating EBITDA margin above 40%
- Capex programme to continue to be large

RATING SENSITIVITIES
An upgrade of Fitch's credit view on Anhui province as well as stronger linkages between the company and Anhui province may lead to positive rating action on AHTrans.

Significant weakening of AHTrans' strategic importance to the province, a significant dilution of the government's shareholding, 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, leading to deterioration in Fitch's internal assessment of the Anhui's creditworthiness and its propensity to provide support.