Fitch Affirms Sfund at 'A-'; Outlook Stable.
Fitch has also affirmed the rating on the USD230 million 3.85% bonds due 2021 at 'A-'. The bonds were issued by GUANGZHOU Silk Road Investment Limited, an indirect, wholly owned subsidiary of Sfund, which provided an unconditional and irrevocable guarantee to the notes.
Sfund is the investment manager for urban infrastructure development projects under Guangzhou's public-private partnership initiative. It also invests in local strategic industry upgrade and innovation. Furthermore, it engages in commercial private equity and venture capital investments. Its revenue mainly comes from management fees and gains from its investments, and leverage increased in the recent years to support its business development.
On 2 August 2018, Sfund became a wholly owned subsidiary of Guangzhou City Construction Investment Group Co., Ltd. (GZCI; A/Stable) under the direction of the Guangzhou municipal government. Sfund and GZCI will focus resources on urban infrastructure development across Guangzhou in southern China, while Sfund will enhance GZCI's capability in the investment domain.
KEY RATING DRIVERS
'Very Strong' Status, Ownership and Control: Sfund remains ultimately fully owned by the Guangzhou municipal government, which exercises tight control over Sfund's government-directed investment activities. The tight control is evident from the seed capital that the municipal government and its departments have provided directly to Sfund, and the periodic reports on investment progress that Sfund must submit to the Guangzhou government.
'Strong' Support Track Record and Expectations: SFund's daily operations are supported by management fees received from the government-directed portfolio. Also, Sfund receives financial support to carry out its mission. The Guangzhou municipal government injected equity capital of CNY6 billion in 2015, CNY4 billion in 2016, CNY100 million in 2017 and CNY12 billion in 1H18. Fitch expects Sfund to receive more capital to support its development.
'Moderate' Social Implications of Default: Sfund is a major investment arm set up by the Guangzhou municipal government and plays an important role in investing in urban infrastructure projects across the city, and supporting the upgrade and innovation of local strategic industries. While its financial distress is unlikely to immediately and materially impact daily life in the city, the government's efforts to foster a more competitive local economy might be hindered in the medium to long term.
'Strong' Financial Implications of Default: Sfund invests and manages a government-directed portfolio. A potential financial distress might have a negative spill-over effect on the financing activities and funding cost of other Guangzhou government-related entities (GREs).
Sfund has become a wholly owned subsidiary of GZCI. As a standard practice, subsidiaries of GREs are rated using the Parent and Subsidiary Rating Linkage criteria. Fitch will adopt a "look through" approach when applying the GRE criteria for the parent-GREs that are sovereign wealth funds or similar institutions, intermediate holding companies with no material operations or debt, or not rated. In this rating assessment, we continue to use the Government-Related Entities Rating Criteria, as we are of the view that the government retains tight control over Sfund's government-directed investment activities and that support for those activities is directly extended by the government.
Also, Sfund invests in urban infrastructure projects and local strategic industries under the government's direction. Government influence is integral in Sfund's strategy and operational direction. In this case, the assessment of the standalone credit profile is considered 'not meaningful'.
Positive rating action could stem from an improvement in the Guangzhou government's ability or incentive to provide support, or improvement support track record and expectations.
Negative rating action could arise from a deterioration of the Guangzhou government's ability or incentive to provide support, diluted government ownership, or lower support track record and expectations.
A rating action on Sfund's IDR could lead to a similar action on its US dollar bonds.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 23, 2019|
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