OREANDA-NEWS. November 24, 2015. Fitch Ratings has assigned Guangzhou Metro Group Co., Ltd. (GZMG) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'A'. The Outlook is Stable. Fitch has also assigned GZMG's US dollar medium-term note (MTN) programme and proposed senior unsecured notes under the programme an expected rating of 'A(EXP)'.

The final rating on the programme and the notes are contingent upon the receipt of final documents conforming to information already received. Notes issued under the MTN programme may be in any currency or of any tenor. The proceeds of the proposed notes will be used for general corporate purposes.

The notes under the MTN programme will be issued by Guangzhou Metro Investment Finance (BVI) Ltd. (GMBVI) and will be unconditionally and irrevocably guaranteed by Guangzhou Metro Investment Finance (HK) Limited (GMHK), a wholly owned subsidiary of GZMG. The notes will be senior unsecured obligations of GMHK and also rank pari passu with all other senior unsecured obligations of GMHK.

In place of a guarantee, GZMG has granted a keepwell and liquidity support deed and a deed of equity interest purchase undertaking to ensure that GMHK has sufficient assets and liquidity to meet its obligations under the guarantee for the notes.

The notes under the MTN programme are rated at the same level as GZMG's IDR, given the strong link between GMHK and GZMG and because the keepwell and liquidity support deed and deed of equity interest purchase undertaking transfer the ultimate responsibility of payment to GZMG.

In Fitch's opinion, both the keepwell and liquidity support deed and the deed of equity interest purchase undertaking signal a strong intention from GZMG to ensure that GMHK has sufficient funds to honour the debt obligations. The agency also believes GZMG intends to maintain its reputation and credit profile in the international offshore market, and is unlikely to default on its offshore obligations. Additionally, a default by GMHK could have significant negative repercussions on GZMG for any future offshore funding.

Fitch would like to emphasise that the MTN programme's rating is for the programme in general and each individual issue under it may not be assigned the same rating as that of the programme.

KEY RATING DRIVERS

Links to Guangzhou Municipality: GZMG's ratings are credit-linked with that of Guangzhou, the capital city of China's prosperous southern province of Guangdong. This is reflected in the Guangzhou government's 100% ownership of the company, strong financial oversight of GZMG, and the strategic importance of GZMG's operation to the city. These factors mean there is a strong likelihood of GZMG getting extraordinary state support, if needed. Therefore, Fitch classifies it as a credit-linked public-sector entity.

Guangzhou's Strong Creditworthiness: Guangzhou ranks third among all cities in the country in terms of gross regional product (GRP). The municipality reported strong fiscal performance, a diversified socio-economic profile and a strategic location at the heart of Pearl River Delta area and southern China.

Strategic Importance: GZMG is the sole metro operator of Guangzhou Municipality, and as such, executes its metro transportation policy. Urban rail transportation has become important in solving increasing congestion on Guangzhou's roads while providing a reliable means of commuting for the city's 13 million residents. Therefore, Fitch believes GZMG will play an even a bigger role in the municipality's sustainable development.

Moderate Standalone Profile: GZMG's standalone credit profile is weaker than its present rating level because of the public-service nature of its activities and high leverage. Fitch has taken a top-down approach to rating GZMG because of its strong strategic links to the municipality.

Strong Government Integration: Guangzhou injected CNY11bn of capital into GZMG from the city's annual budget in 2014, CNY3bn more than in previous years. GZMG says the government has pledged to inject no less than CNY10bn a year from 2015 to fund additional metro lines; the capital injection will come on top of other tax waivers or cuts. GZMG says the government has injected more than CNY14bn in the year to end-October 2015.

New Lines Boost Debt: Fitch expects GZMG's debt to rise 7% within the next three years as the metro network expands. GZMG says the new debt will be serviced through fare adjustments, government subsidies and income from its supplementary business, like real estate. The company says it expects to keep its total liabilities/total assets ratio at around 33% by 2018 (2012-2015: 50%).

Tight State Control, Supervision: GZMG's board members are all appointed by the Guangzhou municipal government, and the government must approve the company's major projects. The Guangzhou State-owned Assets Supervision and Administration Commission is represented on GZMG's board, and is directly involved in the company's major decisions. GZMG says its financing plan and debt levels are also closely monitored by the municipality, and the company has to report its operational and financial results to the government on a regular basis.

RATING SENSITIVITIES

An upgrade of Fitch's internal credit assessment of Guangzhou Municipality as well as a stronger or more explicit commitment of support from the municipality may trigger a positive rating action on GZMG.

Significant weakening of GZMG's strategic importance to the municipality, dilution of the municipality's shareholding to below 75%, and/or reduced explicit and implicit municipality support, may result in a downgrade. A downgrade could also stem from weaker fiscal performance or increased indebtedness of the municipality, leading to deterioration in the municipality's creditworthiness.