OREANDA-NEWS. Fitch Ratings has assigned Yunnan Provincial Investment Holdings Group Co. Ltd.'s (YIG) USD300m 3.375% senior unsecured notes due 2019 a final rating of 'BBB+'.

The assignment of the final ratings follows the receipt of documents conforming to information already received. The final ratings are in line with the expected ratings assigned on 17 March 2016.

The notes were issued directly by YIG. They will be senior unsecured obligations of YIG and rank pari passu with all other obligations of YIG, which will use the proceeds as working capital and for general corporate purposes.

KEY RATING DRIVERS
Links to Yunnan Province: YIG's ratings are credit linked to Yunnan Province. This is reflected in YIG's 100% state ownership, strong provincial oversight on its financials, and strategic importance of the entity's operation to the entire province. These factors result in a likelihood of extraordinary support from the provincial government, if needed. Therefore, YIG is classified as a credit-linked public sector entity under Fitch's criteria.

Yunnan's Healthy Creditworthiness: Yunnan Province has a healthy budget underpinned by strong central government support via China's robust fiscal equalisation system, where less developed regions receive government transfers sourced from more developed areas. The strengths are partially mitigated by its moderate standalone fiscal strength before fiscal transfers from the central government, rapidly rising provincial government debt and relatively weak transparency.

Strategic Importance: YIG is the Yunnan Provincial Government's sole investment holding platform and it is used to manage a diversified portfolio with social and economic purposes, including investments in healthcare, technology, property development, manufacturing and transportation. YIG also holds stakes in key Yunnan financial institutions on behalf of the government. The lack of full flexibility in managing these investments also demonstrates the close linkage between YIG and the Yunnan government.

Solid Track Record of Support: The Yunnan government has injected CNY12bn into YIG through subsidies and capital injections between 2010 and 2014. In 2015, YIG received more than CNY10bn in subsidies and capital injections. Fitch expects government support to continue in coming years as YIG increasingly invests in public-service projects and companies that are not profit-oriented.

Balancing Policy and Commercial Objectives: One of YIG's core operations is to incubate investments in new industries that the Yunnan government seeks to develop. As these investments mature, YIG will exit them and recycle the capital into new projects that support the province's economic development. YIG makes these investments in close consultation with the government to determine their commercial viability and social benefits.

Diversification Mitigates Geographic Concentration: YIG's portfolio is diversified across different industries. In Fitch's opinion, such diversification mitigates the risk of geographic concentration as YIG primarily invests in Yunnan province in line with the provincial government's development plans.

'B' Standalone Credit Profile: The public-service nature of YIG's business means that profit maximization is not its goal. The standalone credit profile of YIG is in the 'B' category, which is weaker than the current rating. But the strong strategic link with the Yunnan Provincial Government and its strategic role in implementing the province's economic and infrastructure development could lead to a high level of extraordinary government support, if needed.

RATING SENSIVITIES
Rating Upgrade: An upgrade of Fitch's internal credit view on the Yunnan Provincial Government as well as a stronger or more explicit support commitment from the province may trigger a positive rating action on YIG.

Rating Downgrade: Significant weakening of YIG's strategic importance to the province, dilution of the province'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 sponsor's creditworthiness.