Rating Action: Moody’s assigns A1 to Beijing State-owned Capital Operation and Management’s guaranteed notesGlobal Credit Research – 14 Feb 2022Hong Kong, February 14, 2022 — Moody’s Investors Service has assigned a rating of A1 to the proposed senior unsecured notes to be issued by Beijing State-owned Capital Operation and Management Center Investment Holdings Limited and guaranteed by Beijing State-owned Capital Operation and Management Company Limited (BSCOMC, A1 stable).The proceeds will be used for repayment of existing indebtedness.The rating outlook is stable.RATINGS RATIONALE”The A1 rating of the proposed notes reflects the unconditional and irrevocable guarantee from BSCOMC and the fact that the notes will rank pari passu with BSCOMC’s senior unsecured obligations,” says Gloria Tsuen, a Moody’s Vice President and Senior Credit Officer.”The proposed guaranteed notes will not materially increase BSCOMC’s overall debt level; instead, they will improve its liquidity and debt maturity profile,” adds Gloria, also Moody’s International Lead Analyst for BSCOMC.BSCOMC’s A1 issuer rating primarily combines (1) its baa1 Baseline Credit Assessment (BCA); and (2) Moody’s assessment of a very high likelihood of support from, and high level of dependence on, the Beijing government and ultimately the Government of China (A1 stable), which results in a rating that is three notches above its BCA.Moody’s very high support assessment reflects the following: 1) BSCOMC is the largest state-owned enterprise (SOE) in Beijing, accounting for more than half of total SOE assets under Beijing State-owned Assets Supervision and Administration Commission (SASAC) ; 2) BSCOMC is 100{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} owned by the Beijing government via Beijing SASAC and positioned by the government as its key state-owned capital operation company; 3) a number of BSCOMC’s underlying investments have high strategic importance to the Beijing government; 4) BSCOMC is mandated to manage the Government of Beijing Investment Fund; and 5) BSCOMC has a track record of support from the government.The support assessment also considers the reputational and contagion risks that may arise if BSCOMC were to default, given BSCOMC’s close linkage with the Beijing government, which runs the capital city of China.As such, Moody’s believes that the central government is likely to support efforts by the Beijing government to seek ways to prevent BSCOMC from defaulting, and thus, avoid the risk of disruption to the domestic financial markets. This support can take various forms, including government subsidies, capital or asset injections, and loans from policy as well as state-owned banks.The high dependence level reflects the fact that BSCOMC and the central government are exposed to common political and economic event risks.BSCOMC’s BCA of baa1 is underpinned by its large and diversified investment portfolio, sound investment track record, and prudent financial management, as indicated by its low market value-based leverage (MVL) of around 14{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} as of the end of September 2021.However, BSCOMC’s BCA is constrained by its high geographic concentration in China and moderate credit contagion risk from some key investees with high financial leverage, such as Shougang Group Co., Ltd. Moody’s expects that BSCOMC would provide liquidity support to such key investees if necessary. But the support to these entities will ultimately come from the government.Moody’s estimates that BSCOMC had an adjusted portfolio value of around RMB407 billion as of the end of September 2021. Its investments span a wide range of industries, including steel, asset management, regulated electric and gas utilities, toll roads, consumer goods, building materials, automobile manufacturing and financial services. These investments provided BSCOMC with an average dividend income of around RMB7 billion per year during 2016-21.In addition, BSCOMC has demonstrated a sound investment track record, which includes successfully developing new businesses, achieving the public listings of its major investees and achieving good returns from its market-oriented investment funds.BSCOMC has a prudent policy on financial management. The company’s debt position and leverage at the holding company level remain largely stable over the past 5 years.Moody’s expects that BSCOMC will have major investment needs of around RMB20 billion-RMB25 billion at the holding company level in 2022, primarily for new equity investments in Beijing SOEs as well as Government of Beijing Investment Fund. Such investments will continue to be partly supported by capital grants from the Beijing government.Moody’s expects BSCOMC’s MVL and adjusted (funds from operations [FFO] + interest)/interest coverage to stay at around 12{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}-14{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} and around 2x-3x, respectively, over the next 1-2 years. Such metrics are appropriate for its baa1 BCA.BSCOMC’s cash and wealth management products at the holding company level of around RMB22 billion as of the end of September 2021 are insufficient to support its short-term debt of around RMB25 billion, including guaranteed debt. But this is counterbalanced by BSCOMC’s strong access to bank credit and the capital markets, because of its status as a high-profile SOE owned by the Beijing government.BSCOMC’s issuer rating also takes into account the following environmental, social and governance (ESG) considerations.BSCOMC has moderate exposure to environmental risk factors because 20{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} of the company’s investment portfolio focuses on the steel industry. Steel makers in China face increasingly stringent requirements on carbon emissions and heightened costs. Nevertheless, BSCOMC’s investment portfolio covers a wide range of industries, in addition to steel, that have low exposure to environmental risk. The sizable portfolio and good business diversification provide some stability to the company’s portfolio value and dividend income stream.BSCOMC has moderate exposure to social risks related to demographic and societal trends because 11{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} of the company’s investment portfolio focuses on regulated electric and gas utilities. However, BSCOMC’s well-diversified investment portfolio can mitigate the volatility in business and financial performance arising from certain investees. Meanwhile, because most of the investments are concentrated in Beijing, BSCOMC can benefit from the city’s well-developed economy and increasing population.In assessing BSCOMC’s governance risk, Moody’s takes into consideration its 100{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} ownership by the Beijing government. BSCOMC demonstrates a prudent investment approach and sound risk management. The company has refrained from expanding aggressively despite its abundant financial resources. Despite its unlisted status, BSCOMC — as a domestic bond issuer — regularly discloses its financial information.The stable outlook reflects 1) the stable outlook on the China sovereign rating; and 2) Moody’s expectation that BSCOMC will prudently manage its investment and that its leverage will remain appropriate for its baa1 BCA.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSBSCOMC’s rating could be upgraded if the Beijing government and ultimately the Chinese government’s ability to provide support strengthens, which would be illustrated by an upgrade of China’s sovereign rating, in the absence of a weakening of BSCOMC’s BCA.BSCOMC’s BCA could be upgraded if BSCOMC’s investment portfolio materially improves, including an enhanced credit quality of key investees, and stronger business and geographic diversification of its investment portfolio.Credit metrics that will lead to an upgrade of its BCA include an adjusted MVL below 10{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} and FFO/interest coverage higher than 4.0x on a sustained basis.However, a BCA improvement alone will not trigger a rating upgrade, given that BSCOMC is already rated at par with the sovereign.BSCOMC’s rating would be downgraded if the Beijing government and ultimately the Chinese government’s ability to provide support weakens, which would be illustrated by a downgrade of China’s sovereign rating.BSCOMC’s BCA could be downgraded to baa2 if it embarks on aggressive debt-funded investments, or there is a substantial weakening in the credit quality of its major investees.Credit metrics indicative of downward pressure on its BCA include an adjusted MVL exceeding 15{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996}-20{21df340e03e388cc75c411746d1a214f72c176b221768b7ada42b4d751988996} and FFO/interest coverage lower than 1.5x for a prolonged period.However, such a moderate weakening in the company’s BCA is unlikely to immediately lead to a downgrade of its rating, given the very high likelihood of government support.The methodologies used in this rating 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.Established in 2008, Beijing State-owned Capital Operation and Management Company Limited is a wholly-owned capital operating company under the Beijing municipal government. It is an important platform for managing state-owned assets and capital on behalf of the government, aiming to securitize and maximize the value of these state-owned assets. Moody’s estimates that BSCOMC’s investment portfolio had a total portfolio value of RMB407 billion as of the end of September 2021.The local market analyst for this rating is Yuting Liu, +86 (106) 319-6530.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Beijing State-owned Cap Op and Mgmt Ctr Inv — Moody’s assigns A1 to Beijing State-owned Capital Operation and Management’s guaranteed notes
