Fitch Rates Chongqing Nan'an Urban Construction & Development's USD Notes 'BBB+(EXP)'
The proposed notes will constitute direct, unconditional, unsubordinated and senior unsecured obligations of CQNA. The net proceeds will be used for general corporate purposes.
The final ratings on the proposed US dollar notes are contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Linked to Chongqing Municipality: CQNA's ratings are credit-linked to, but not equalised with, the assessment of Chongqing Municipality's credit profile. Chongqing is one of four municipalities under the direct responsibility of China's central government. The link reflects strong government oversight and supervision of CQNA, moderate integration with the government budget and CQNA's public-sector business's moderate strategic importance to the municipality. The company is classified as credit-linked to the municipality under Fitch's Public-Sector Entity criteria. Fitch believes CQNA is likely to receive extraordinary support from the municipal government, if needed.
Chongqing's Strong Creditworthiness: Chongqing Municipality's gross regional product growth rate was China's fastest in 2015. Its gross regional product on a per capita basis ranked 12th among all provincial-level local governments. The company's strengths of strong fiscal performance and diversified socio-economic profile are mitigated by moderately high contingent liabilities arising from its state-owned entities.
Legal Status Attribute Mid-Range: CQNA is registered as a state-owned limited liability company under Chinese company law. It is majority-owned by the Chongqing Nan'an District Department of Finance and under the direct supervision of Chongqing Nan'an State-Owned Assets Supervision and Administration Commission.
Strategic Importance Attribute Mid-range: CQNA is one of the most important urban developers in Chongqing. The company executes the government's urbanisation plan for the Chongqing Nan'an district. Its business focuses on urban infrastructure and primary land development. CQNA also acts as a funding centre for state-owned enterprises within the district.
Government Integration Attribute Mid-Range: Given the district government's strong fiscal and operational linkage with the Chongqing municipal government, Fitch believes support, if required, will ultimately come from the Chongqing municipal government, which has provided capital injections and subsidies to monetarily support CQNA's business. The company received CNY187m in 2013, CNY356m in 2014 and CNY502m in 2015, representing 10.2%, 57.5% and 79.5% of operating revenue, respectively based on Fitch's calculations. The fiscal support aims to partly fund CQNA's capital expenditure and meet its debt servicing and liquidity needs.
Tight Control and Supervision: The government closely monitors CQNA's financing plan and debt levels. The company regularly reports its budget performance and its board members, except for employee representatives, are appointed by the government. The Control attribute is assessed at Stronger.
Weak Standalone Profile: CQNA's standalone credit profile is constrained by the public-service nature of its business of building affordable housing and developing infrastructure projects. The company has some businesses operated on a partly commercial basis, which help make up for losses incurred by its public-service projects. However, these businesses are still far from market-based. The weak standalone credit profile is mitigated by its strategic links with the government.
A stronger or more explicit municipal government support commitment may trigger positive rating action on CQNA. Significant changes to CQNA's strategic importance, dilution of the government's shareholding or reduced implicit government support could lead to a wider rating gap between CQNA and its sponsor.
An upgrade of Fitch's credit view on Chongqing Municipality may trigger positive rating action on CQNA. Negative rating action on CQNA could derive from a deterioration of the credit profile of Chongqing Municipality, which could lower Fitch's internal assessment of the municipality's creditworthiness.
A rating action on CQNA would also lead to similar action on the rating on the proposed US dollar notes.