Rating Action: Moody’s assigns first-time A2 rating to Shandong Finance Investment Group Co., Ltd; outlook stable
Global Credit Research – 11 Jan 2021
Hong Kong, January 11, 2021 — Moody’s Investors Service has assigned a first-time A2 issuer rating to Shandong Finance Investment Group Co., Ltd.
The outlook is stable.
Shandong Finance Investment’s A2 issuer rating is based on (1) the Shandong government’s capacity to support (GCS) score of a1, and (2) Moody’s assessment of how the company’s characteristics affect the Shandong government’s propensity to support, resulting in a one-notch downward adjustment.
Moody’s assessment of Shandong’s GCS score reflects (1) its status as a strong province and its position on one of the higher administrative levels in Moody’s assessment of the hierarchy of regional and local governments (RLGs) in China (A1 stable); and (2) its relatively solid economic and fiscal profile, strong local state-owned enterprises (SOEs) and healthy local financial system.
Shandong Finance Investment’s A2 rating also reflects the Shandong government’s propensity to support the company, given (1) the Shandong government’s ultimate 100% ownership of the company; (2) the company’s role in supporting the province’s shantytown renovation program and industry upgrade efforts; (3) its track record of receiving subsidies, capital injections and management fees from the Shandong government, which totaled RMB29 billion in 2017-1H2020; and (4) its strong access to funding, with around 80% of its total debt from policy banks as of 30 June 2020 and no reliance on non-standard financing channels.
Shandong Finance Investment is the sole provincial-level centralized financing entity for the province’s shantytown renovation program, excluding projects in Qingdao and Jinan (but including Laiwu district). It is the nominal borrower, raising funds from policy banks and national commercial banks for on-lending to lower-tier governments and their local government financing vehicles (LGFVs) to fund the renovation of rundown urban areas.
Shandong Finance Investment also supports the province’s economic development and efforts to upgrade its industries by managing government-led investments on behalf of the province’s Finance Bureau.
However, the one-notch downward adjustment from the Shandong government’s GCS score reflects the lack of predictability on payments that Shandong Finance Investment receives from the government, based on the volatility of capital injections over the past three years, which decreased to RMB1.9 billion in 2019 from RMB15.4 billion in 2017. Still, Moody’s expects the amount to rebound to RMB6-7 billion for 2020.
The A2 rating also considers Shandong Finance Investment’s credit profile relative to other rated peers in the same province and those with similar policy roles in other provinces.
The rating takes into account the following environmental, social and governance (ESG) factors.
Shandong Finance Investment bears high social risks as the sole provincial-level centralized financing entity for the province’s shantytown renovation program. Although the company is not directly involved in the building and operating of public infrastructure projects, any major changes in demographics, public awareness and social priorities will affect the government’s targets for and propensity to support the company.
Governance considerations are also material to the rating as Shandong Finance Investment is subject to oversight by the Shandong government and has to meet several reporting requirements, reflecting its public-policy role and status as a government-owned entity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Shandong Finance Investment’s stable outlook reflects (1) the stable outlook on China’s sovereign rating; (2) Moody’s expectation that the Shandong government’s GCS score will remain stable; and (3) the Shandong government’s control and oversight of the company will remain largely unchanged over the next 12-18 months.
Moody’s could upgrade the rating if (1) China’s sovereign rating is upgraded and Shandong’s GCS strengthens, which could arise from a significant strengthening in Shandong’s economic or financial profile or its ability to coordinate timely support; or (2) Shandong Finance Investment’s characteristics change in a way that strengthens the Shandong government’s propensity to support, such as:
– It receives more government payments consistently, such that dedicated fiscal budget allocations and transfers from higher-tier governments can consistently cover a large share of its operational and debt-servicing needs
– It becomes more strategically important to the Shandong government by providing more public services to benefit a bigger population
Moody’s could downgrade the rating if (1) China’s sovereign rating is downgraded or Shandong’s GCS weakens, which could arise from a significant weakening in Shandong’s economic or financial profile or its ability to coordinate timely support; (2) changes in Chinese government’s policies prohibit RLGs from providing financial support to LGFVs; or (3) Shandong Finance Investment’s characteristics change in a way that weakens the Shandong government’s propensity to support, such as:
– Its core businesses undergo material changes, including a substantial expansion into commercial activities that result in substantial losses or at the cost of public services
– Its debt and leverage rapidly increase without a corresponding rise in government payments, leaving the company reliant on high-cost financing, including through non-standard channels
– Its loans, guarantees or other credit exposures to external parties materially increase from current levels
The principal methodology used in these ratings was Local Government Financing Vehicles in China Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216254. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Established in 2015, Shandong Finance Investment is 90%-owned by the Finance Bureau of Shandong province and 10%-owned by the Social Security Fund of Shandong province. The company reported total assets of RMB252.2 billion and a total revenue of RMB822 million for 2019.
Shandong Finance Investment’s key business is to raise funds from financial institutions (mainly policy banks) and to on-lend the net proceeds to local governments in Shandong province for their shantytown renovation projects, excluding projects in Qingdao and Jinan (but including Laiwu district). The company also manages investment funds and equity investments on behalf of the Finance Bureau, which are funded by government fiscal funds and by the company.
The local market analyst for this rating is Cindy Yang, +86 (106) 319-6570.
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.
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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_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
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