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Rating Action: Moody's affirms Beijing Capital Group's Baa3 ratings; outlook stable
Global Credit Research - 19 Aug 2020
Hong Kong, August 19, 2020 -- Moody's Investors Service has affirmed Beijing Capital Group Co., Ltd.'s (BCG) Baa3 issuer rating, as well as the Baa3 senior unsecured ratings on the USD notes issued by Beijing Capital Polaris Investment Co., Ltd. and guaranteed by BCG.
At the same time, Moody's has affirmed the provisional (P)Baa3 senior unsecured rating on the medium-term note (MTN) program of Beijing Capital Polaris Investment Co., Ltd. The MTN program is unconditionally and irrevocably guaranteed by BCG.
All the outlooks are stable.
"The ratings affirmation reflects our expectation that Beijing Capital Group's high debt leverage will gradually improve over the next 12-18 months, which will support its Baseline Credit Assessment (BCA)," says Kaven Tsang, a Moody's Senior Vice President.
"At the same time, we expect the company will continue to receive strong support from the Beijing city government, which in turn supports the three-notch rating uplift," adds Tsang.
RATINGS RATIONALE
BCG's Baa3 issuer rating reflects (1) its BCA of ba3; and (2) Moody's assessment of a strong likelihood of support from and the company's high level of dependence on the Beijing municipal government and, ultimately, the Government of China (A1 stable).
This support assessment reflects BCG's (1) important role in providing essential water supply, social housing and subway services to China's capital city, and its policy function of supporting small and medium-sized enterprises, and the agricultural sector through its financial services operations; (2) 100% ownership by the Beijing government; and (3) track record of receiving government support.
BCG's BCA of ba3 reflects the company's (1) diversified portfolio, with four major businesses that exhibit different industry dynamics, a feature that reduces the company's risk exposure to any individual business segment; (2) stable water services and infrastructure businesses, which provide a strong and stable source of income and a buffer against the volatility associated with the company's real estate business; and (3) diversified funding channels and good access to domestic funding.
On the other hand, BCG's BCA is constrained by the company's high debt leverage.
Moody's expects that the company's adjusted net debt/EBITDA will improve to 8.5x-9.0x in 2021 after rising to around 9.7x in 2020 from 9.3x in 2019 on the back of the coronavirus outbreak in Q1 2020.
Moody's expects BCG's EBITDA will remain relatively flat in 2020 and grow around 15% in 2021, mainly supported by the growing sales of its property arm, Beijing Capital Land Limited (Ba3 stable), growing income from the expansion of its water services and environmental protection operations, and stable performance of its infrastructure and financial services businesses.
BCG's stable water services and infrastructure businesses, contributing around 40% of the company's EBITDA, provide a strong and recurring source of earnings that will buffer against the volatility associated with the company's real estate business.
Beijing Capital Co., Ltd., BCG's main platform for environmental protection business, is a leading player in China's water services sector. Moody's expects the EBITDA from this business segment will grow by around 20% in the next 1-2 years after the expansion carried out in the last 2-3 years. This growth in turn will lower the leverage position of this segment, while solid market demand for subway services in Beijing will support stable income.
In addition, Moody's expects BCG will adopt a more measured approach towards business growth to fulfill its deleveraging plan.
The company's net debt growth peaked at 29% in 2018, and slowed to 14% in 2019. Moody's expects BCG's net debt growth will further slow to 5%-10% in 2020 and 2021, as the company controls its debt leverage, against the backdrop of the Chinese government's policy to prioritize deleveraging for state-owned enterprises.
BCG also plans lower its leverage over the next 12-18 months through the accelerated disposal of non-core assets, and equity issuance via listed subsidiaries to partially fund their business growth.
BCG has inadequate liquidity at the consolidated level. The company's cash sources and estimated annual operating cash flow over the next 18 months are insufficient to cover scheduled debt repayments and capital spending over the same period.
Nevertheless, BCG has strong access to the bank and capital markets, enabling it to raise funds to support its operating and refinancing needs, underpinned by its close linkage with the Beijing municipal government.
In assessing BCG's governance risk, Moody's has taken into consideration its 100% ownership and the direct supervision and management oversight exercised by the State-owned Assets Supervision and Administration Commission (SASAC) of the Beijing Municipality.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable rating outlook reflects (1) the stable outlook on China's sovereign rating; and (2) Moody's expectation that the company will gradually lower its leverage to a level appropriate for its ba3 BCA over the next 12-18 months.
The ratings could be upgraded if (1) the likelihood of government support for BCG increases; or (2) BCG's standalone credit profile improves significantly, or both.
Moody's would raise BCG's BCA if it demonstrates prudence in pursuing growth and achieves further deleveraging, as seen by adjusted net debt/EBITDA below 6.5x and funds from operations/net debt above 10% on a sustained basis.
The ratings would be downgraded if Moody's lowers BCG's BCA because of a material deterioration in its business profile or financial position, without any material changes in the support assessment.
Moody's could lower BCG's BCA if adjusted net debt/EBITDA fails to trend towards 7.5x-8.0x or funds from operations/net debt fails to trend towards 5%-7.5%.
A downgrade of BCG's ratings, without a lowering of its BCA, could also be triggered by a reduction in the company's importance to the Beijing municipal government, or a weakening of the municipal government's ability to support the company.
The methodologies used in these ratings were Investment Holding Companies and Conglomerates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125855, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Founded in 1994, Beijing Capital Group Co., Ltd. is 100% owned by the Beijing municipal government and is under the direct supervision of the State-owned Assets Supervision and Administration Commission of the Beijing Municipality. The company's operations are divided into four major business segments: (1) environmental protection; (2) infrastructure; (3) real estate; and (4) financial services.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Kaven Tsang Senior Vice President Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Franco Leung Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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