Fitch has assigned Lianyungang Port Group Co., Ltd. (LYGP) a Long-Term Issuer Default Rating of ‘BBB’. The Outlook is Stable.
The rating is equalised with Fitch’s internal assessment of Lianyungang Municipality’s creditworthiness in accordance with Fitch’s Government-Related Entities Rating Criteria, reflecting its strong linkage to the municipal government.
Fitch has also assessed LYGP’s standalone credit profile (SCP) at ‘b’, which is underpinned by LYGP’s strategic position as one of the largest coastal ports in China, and its coverage of a large hinterland via a well-developed transportation network. The SCP also factors in competition from other ports and our expectation that LYGP’s leverage will be high in a medium term. It also considers LYGP’s high reliance on short-term debt with corporate-style funding with loose covenants and bullet. Fitch’s rating case forecasts the net debt/EBITDA to stay above 15x in the next five years with a five-year average of 15.3x.
KEY RATING DRIVERS
Strength of Linkages: Fitch sees LYGP’s status, ownership and control as ‘Strong’. Lianyungang Port Holding Group Ltd, which is indirectly wholly owned by the Lianyungang municipal government, owns about 90% of LYGP and China Development Fund Co. Ltd. owns the remainder. The Lianyungang government appoints, supervises and evaluates the key members of LYGP’s management, and controls LYGP’s operational, investing and financial activities.
Fitch assesses the support record as ‘Very Strong’, reflecting LYGP’s record of consistent subsidies from the government, in the form of special-fund support, interest subsidies, tax incentives, and favourable policies. LYGP also expects to receive funding support for its future capex needs. Fitch expects such substantial support to be forthcoming if needed.
Incentive to Support: Fitch views the socio-political impact of a LYGP default as ‘Strong’. LYGP is the largest government-related entity in Lianyungang City by employee size, tax contribution and total registered capital. LYGP is vital in the regional supply chain as it connects a wide range of upstream and downstream industries. There are no other entities with similar scale and capacity in the region that can immediately substitute the company without severe service disruptions. A default would be detrimental to Lianyungang’s social and political status and stability.
Fitch deems the financial implications of a LYGP default as ‘Very Strong’. LYGP is the largest and most frequent lender among the Lianyungang’s state-owned enterprises (SOEs). LYGP and the municipal government have close financial and operational ties. A default of LYGP would impair other SOEs’ ability to borrow and raise costs for other GREs in the city and the government. Therefore, Fitch believes the government has a strong incentive to support LYGP if needed.
Strategic Location, Well-Diversified Customers and Cargos – Revenue Risk (Volume): High Midrange
Lianyungang port is listed as one of the 11 national-level international key hub ports in China and the sole seaport in Jiangsu Province. It is one of the few ports in China with a comprehensive sea-railway transportation system. It serves a large hinterland, benefitting from its strategic location adjacent to the Yangtze River Delta and Bohai economic development zones, as well as strong rail and road links.
The port also benefits from a well-diversified customer base, cargo types and business lines, although the throughout mix is dominated by more volatile commodities, which account for 80% of its total volume. Management expects to gradually increase cargo types with higher tariffs, such as metallic ore, machinery and chemical products, which will improve the margin of the port.
Moderate Tariff Flexibility, Lack of Take-or-Pay Contracts – Revenue Risk (Price): Midrange
LYGP, similar to most Chinese ports, follows the prevailing mixed pricing mechanism. Currently less than 10% of LYGP’s revenues are required to follow government-set or -guided tariffs, while LYGP has flexibility to set the tariffs for the reminder. However, the port’s overall pricing power is constrained by competition from nearby ports, and its historical performance shows limited growth in tariff. LYGP also has limited take-or-pay arrangements or long-term contracts, but Fitch believes this can be mitigated by high stickiness and stability of its customer base.
Well-Maintained Facilities, Substantial Expansion Programme – Infrastructure Development & Renewal: Midrange
LYGP’s capex will remain high over the medium term, reflecting its commitment as a national-level port to facilitate rapid development of the port industry and solidify its industry position. LYGP plans to spend around CNY8 billion over 2022-2024 to upgrade its facilities and increase capacity to accommodate larger container ships, add more berths and expand network coverage. LYGP expects to fund its capex through its internal cash flow, capital-market borrowing and government subsidies. It also has flexibility to defer the expansion plan if needed.
Corporate-Style Borrower, Reliance on Short-Term Debts: Debt Structure: Weaker
LYGP is a typical corporate borrower with mainly bullet and loosely covenanted debts. It is highly reliant on short-term debt, which exposes it to high refinancing risk. Fitch expects LYGP’s debt repayment to peak in 2022 and EBITDA to be insufficient to cover total debt service requirements in 2022-2026. However, this risk can be eased by its cash in hand and unused bank facilities. In addition, it benefits from its access to various funding sources and long-established relationships with major commercial banks in China. It has been a frequent bond issuer in the domestic market and able to borrow at reasonable costs.
LYGP has an ESG Relevance Score of ‘4’ for Management Strategy, reflecting sizeable short-term debts and a heavy reliance on new borrowings to repay the short-term debts. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Other than for Management Strategy, the highest level of ESG credit relevance is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg
PEER GROUP
JSW Infrastructure Limited (JSWIL, BB+/Stable) is the second-largest commercial port operator in India. JSWIL’s capacity has increased by 4.5 times in last six years. Its ports and terminals are well-diversified by geography along both the eastern and western coasts of India. It also benefits from expected growth in cargo volumes, take-or-pay contracts for about 41% of total revenue and fully funded capex. JSWIL’s average net debt/EBITDA in Fitch’s rating case is 4.1x, which justifies its rating being four notches higher than LYGP’s SCP.
PT Pelabuhan Indonesia (Persero) (Pelindo, BBB/Stable, SCP: bbb-) is the only Indonesian state-owned port operator, operating the primary ports of call across the country. It has 87 ports across the archipelago, including four of the country’s flagship ports. Pelindo dominates Indonesia’s container market and faces limited competition. Pelindo’s SCP is supported by its dominance of the container port industry in Indonesia, strategic location of its flagship ports as well as the long term of its concession, which ensures visibility of group cash-flow generation. Pelindo’s net debt/adjusted EBITDA is forecast to average 6.5x over 2021-2025 in our rating case. Pelindo’s much stronger market position and its lower rating-case net leverage explains its higher SCP than that of LYGP.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Weakening in Fitch’s internal assessment of Lianyungang Municipality’s creditworthiness; or
Weakening in linkage to Lianyungang Municipality
LYGP’s SCP may be revised down if its credit profile weakens, or a liquidity crunch is imminent, or it fails to refinance its upcoming September 2022 debt maturity ahead of time.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Strengthening in Fitch’s internal credit assessment of Lianyungang Municipality’s creditworthiness, provided the linkage to the municipality remains intact
LYGP’s SCP may be revised up if there is a material deleveraging for a sustained period
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
TRANSACTION SUMMARY
The port of Lianyungang is located on Haizhou Bay in Jiangsu Province on the east coast of China, about 620km southeast of Beijing and 430km northwest of Shanghai. The port is close to the Bohai Rim Economic Zone to the north and the Yangtze River development economic zone to the south. The port also connects to key railways or expressways, including the Longhai-Lan-Xin Line, Lian-Huo highway, Tong-San highway and the Coastline railway.
FINANCIAL ANALYSIS
The Fitch base case represents Fitch’s expected performance for the assets, which is developed largely following management’s projection. The Fitch base case indicates an average net debt/EBITDA of 14.3x for 2022-2026.
The Fitch rating case applies 5% haircut on the revenue while keeping the EBITDA margin at the historical level. The Fitch rating case also adds 200 bp stress on borrowing costs and 5% stress on capex, resulting in an average net debt/EBITDA of 15.3x during the forecast period.
DATE OF RELEVANT COMMITTEE
16 March 2022
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
LYGP has an ESG Relevance Score of ‘4’ for Management Strategy, reflecting sizeable short-term debt and a heavy reliance on new borrowings to repay the short-term debts. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Source: Fitch Ratings