Fitch Publishes Tianjin Free Trade Zone Investment's 'BBB+' Rating; Outlook Stable
Fitch has also assigned Tianjin FTZIH's wholly owned offshore subsidiary Hongkong Baorong Development Limited's (HKBR) upcoming US dollar and/or euro bond a 'BBB+(EXP)' expected rating. The bond proceeds will be for general corporate purposes. The bonds will represent direct, unconditional and unsecured obligations of HKBR and also rank pari passu with all obligations of HKBR.
The bond benefits from a keepwell and liquidity support deed and a deed of equity interest purchase undertaking issued by Tianjin FTZIH. In Fitch's opinion, the keepwell and liquidity support deed and the deed of equity interest purchase undertaking all signal a strong intention from Tianjin FTZIH to ensure that HKBR has sufficient funds to honour its debt obligations. The final rating is contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Links to Tianjin Municipality: Tianjin FTZIH's ratings are credit-linked to Fitch's internal assessment of Tianjin Municipality, the company's sponsor. This is because the municipality owns all of Tianjin FTZIH, has strong oversight of the company's financial performance, and the company is of strategic importance to the municipality. These factors result in a strong likelihood of extraordinary support from the municipality to the company, if needed. Therefore, Tianjin FTZIH is classified as a credit-linked public-sector entity under Fitch's criteria.
Tianjin's Strong Creditworthiness: Tianjin municipality has a satisfactory budget performance, diversified socio-economic profile and strategic importance as one of the two core cities in the Bohai Rim Economic Zone in northern China. The city's resilient property market also strengthens the municipality's fiscal flexibility as property-related transactions are a key source of revenue. The strengths are partially mitigated by moderately high contingent liabilities arising from its state-owned entities, and relatively weak transparency.
Strategic Importance: Tianjin FTZIH is an integrated body of Tianjin Municipality's flagship economic development zone - Tianjin Port Free Trade Zone (Tianjin Port FTZ) and plays an important role in implementing Tianjin government and Tianjin Port Free Trade Zone Administration Committee's (Tianjin FTZAC) blueprint of Tianjin Port FTZ. Tianjin FTZIH is the sole entity developing large-scale urban infrastructure projects, providing utilities services and inviting investment and forming joint ventures with outside parties on the government's behalf.
Public Funding Commitment: Tianjin FTZAC is committed to providing at least
CNY3bn in funding to the company either via subsidies or capital injections to ease the company's debt servicing pressure, enhance its financial flexibility and support its capex.
Tight Control and Supervision: The company's board members are mainly appointed by the Tianjin municipal government and its major projects need the municipal government's approval. The company's financing plan and debt level are also closely monitored by the municipality. Tianjin FTZIH is required to report to the Tianjin municipal government and Tianjin FTZAC its operational and financial results on a regular basis.
Moderate Financial Profile: Tianjin FTZIH's financial profile is weak, with sizeable capital expenditure, negative free cash flow and high leverage in the past three years. Fitch believes this trend will continue in the medium term driven by the ongoing infrastructure improvement in Tianjin Port FTZ. Nevertheless, Fitch expects extraordinary and on-going support from Tianjin FTZAC and ultimately Tianjin Municipality to partly neutralise such risk.
RATING SENSITIVITIES
An upgrade of Fitch's internal credit assessment of Tianjin Municipality as well as a stronger and/or more explicit support commitment from the municipality may trigger a positive rating action on Tianjin FTZIH.
Significant weakening of Tianjin FTZIH's strategic importance to the municipality, dilution of the government's shareholding, and/or reduced explicit and implicit municipality support, may result in a downgrade. A downgrade could also stem from a weaker fiscal performance or increased indebtedness of the municipality, leading to deterioration in the sponsor's internally assessed creditworthiness.
Any rating action on Tianjin FTZIH will result in a similar rating action on the rated bond issued by HKBR.
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