OREANDA-NEWS. November 03, 2015. Fitch Ratings has affirmed Beijing Capital Group Company Limited's (BCG) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR) at 'BBB' with a Stable Outlook. Fitch has also affirmed BCG's senior unsecured rating and the ratings of all outstanding bonds at 'BBB'.

KEY RATING DRIVERS
Standalone 'BB+' Rating: BCG's standalone 'BB+' rating is based on the credit profiles of its three key business divisions - infrastructure, environment protection and real estate. BCG will soon raise its stake in Beijing Capital Land Ltd. (BCL, BB+/Stable) to become a majority shareholder, but it continues to be structurally subordinated to substantial shareholders in the other key subsidiaries that are either listed or have other strong shareholders. BCG is also highly dependent on dividends received to service its interest costs. However, Fitch believes that BCG's business diversification mitigates the structural subordination.

Property Assets Restructuring: BCG will increase its stake in BCL from 46% to 63% in early November and will treat BCL as its only real-estate platform in the future. BCG will restructure its property segment and aims to eventually consolidate all of its property assets into BCL.

Following this change, Fitch assesses BCG's property segment on a consolidated basis and the agency expects leverage, as measured by net debt/adjusted inventory, to be less than 50% for the next three years. This puts the credit profile of BCG's property segment closer to a mid-'BB' category. The agency has used a conservative appraised value for the land held by BCG to derive the property segment's adjusted inventory.

Stable Infrastructure Segment: BCG's infrastructure segment mainly consists of Beijing MTR Co. Ltd and Tianjin Beijing Expressway Co., Ltd. Beijing MTR remains committed to invest CNY30bn in Beijing subway line 14 and 16. Beijing MTR has not yet started paying for the construction of these subway lines, with the work still funded by Beijing Infrastructure Investment Co. Ltd. (A+/Stable). We expect Beijing MTR to start paying for line 14 from 2016 and the operation to contribute positive EBITDA from 2019. However, the earnings contributions from the new subway lines will likely lag capex spending. The infrastructure segment will maintain an FFO-adjusted net leverage of 3x, which is in line with a low 'BBB' credit profile.

Environment Protection Leverage To Recover: BCG's environment protection business, operated through Beijing Capital Co. Ltd (BCC), continues to be a core operation, as demonstrated by the transfer of waste management company New Zealand TPI from BCG to BCC. BCC's financial metrics will be under pressure in the short term because of the acquisition, but Fitch expects BCC's financials to recover within two years.

Weak Interest Coverage To Improve: BCG's ratio of dividends to interest expenses continued to be lower than 1x in 2014, mainly due to reinvestment of profits in Beijing MTR and its financial businesses. BCG's plans to dispose of its non-core businesses, such as restaurants, hotels and investment property, and its land reserve, to lower debt and strengthen its cash position. Fitch expects the dividend to interest ratio to quickly improve to around 2x once the disposals are completed.

Moderate Government Support: BCG's ratings continue to benefit from a two-notch uplift due to its moderately strong linkage with the Beijing municipal government. BCG acts as an aggregator of private capital to be channelled towards investment in public goods, like subways, environmental facilities, and primary land development in the greater Beijing region, and financial services like government-guaranteed loans for SMEs and agriculture businesses in Beijing.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Assumptions used in the rating cases for BCL and BCC are used in BCG's rating case
- Infrastructure segment's revenue to increase by around 10% in 2015

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- BCG's ratio of dividend and interest income to interest expense falls below 1.2x from 2016 (0.84x in 2014)
- Failure of BCL to realise the value embedded in the land currently held by BCG
- Material weakening of the credit profile of its three core subsidiaries
- Any signs of weakening linkage with the Beijing government

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Material strengthening of the credit profile of its three core subsidiaries
- Any signs of stronger linkage with the Beijing government

The full list of rating actions is as follows:

Beijing Capital Group Limited
- Long-Term Foreign-Currency IDR affirmed at 'BBB'; Outlook Stable
- Long-Term Local-Currency IDR affirmed at 'BBB'; Outlook Stable
- Senior unsecured rating affirmed at 'BBB'

Issued by Beijing Capital Polaris Investment and guaranteed by BCG
- USD600m 2.875% senior notes due 2018 affirmed at 'BBB'

Issued by Rosy Capital Global with keepwell from BCG
- CNY1.3bn 5.25% senior notes due 2018 affirmed at 'BBB'