Fitch Ratings - Hong Kong - 13 Jan 2021: Fitch Ratings has affirmed China-based toll-road operator Inner Mongolia High-Grade Highway Construction and Development Company Ltd.'s (IMHCD) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB-'. The Outlook is Stable.

IMHCD was founded in 2004 and is wholly owned by the Department of Transport of the Inner Mongolia Autonomous Region in China. The company primarily engages in toll-road operation and development, and has other ancillary businesses, such as service area operation and advertisement. IMHCD had CNY107.4 billion in total assets and CNY21.3 billion in net assets at end-September 2020.

KEY RATING DRIVERS

'Very Strong' Status, Ownership and Control: IMHCD is registered as a limited liability company and is 100% owned by Inner Mongolia's Department of Transport. IMHCD's major strategic decisions must be reported to the Department of Transport and the provincial government, which assigns IMHCD projects under its regional development plans, including highway network development.

'Strong' Support Record: IMHCD receives ongoing monetary and non-monetary government support as the government's primary transportation infrastructure construction arm. IMHCD's major monetary support comes from the central and local governments, and includes financial grants and capital injections sourced from the vehicle-purchase tax and other taxes. Non-monetary support is provided through exclusive concession rights to operate toll roads and favourable tax and accounting treatment. Fitch expects the government to continue offering support to IMHCD for undertaking ongoing highway development projects.

'Moderate' Socio-Political Default Implications: The Inner Mongolia government has designated IMHCD as the flagship toll-road operating and development company at the autonomous-region level. By end-June 2020, IMHCD managed 37 toll roads, including 2,153 km of highways, representing 30%-40% of the total highways in operation in Inner Mongolia. The company has also been commissioned to undertake five new highway projects in the region, with total planned investment of CNY22 billion. Fitch believes highways are indispensable to local residents for transportation and mobility as Inner Mongolia is sparsely populated. IMHCD's financial failure could delay progress in transportation infrastructure construction, which will have 'Moderate' socio-political repercussions for the government.

'Very Strong' Financial Default Implications: IMHCD is the largest functional government-related entity (GRE) that is wholly owned by the autonomous region's government. The company has actively raised funds from the domestic and international capital markets to fund the development of the region's major transportation network. Fitch believes a default by IMHCD could significantly hurt the creditworthiness of the autonomous region's government and the financing activities of other local GREs.

'b' Standalone Credit Profile: IMHCD's Revenue Defensibility and Operating Risk are assessed at 'Weaker' and 'Midrange', respectively, considering its high geographic and industry concentration, as well as the low flexibility in adjusting toll rates. Its 'Weaker' financial profile is constrained by its stretched net debt to EBITDA of above 20x over the forecast period to 2024 as well as ongoing debt-funded capex.

In June 2020, IMHCD entered into a debt optimisation programme with a consortium of 12 banks, led by China Development Bank, a policy bank. Under the programme, IMHCD will replace CNY76.3 billion of debt that it raised for 34 of its managed toll-roads with new bank loans with 30-year tenor and lower interest rates. The debt involved represented over 90% of IMHCD's outstanding debt at end-September 2020. The first batch of loans of CNY24.0 billion has been released to IMHCD. Fitch believes the programme will alleviate IMHCD's near-term refinancing pressure and enhance its overall liquidity position.

DERIVATION SUMMARY

IMHCD's ratings are assessed under Fitch's Government-Related Entities Rating Criteria, reflecting Inner Mongolia Autonomous Region's ownership, direct control and strong support of the company. Fitch has also factored in the socio-political and financial implications for the government if IMHCD were to default.

The ratings of IMHCD also consider its Standalone Credit Profile, which is assessed at 'b' under the Public Sector, Revenue-Supported Entities Rating Criteria.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- An upward revision in Fitch's credit view of Inner Mongolia Autonomous Region's ability to provide subsidies, grants or other legitimate resources allowed under China's policies and regulations.

- A stronger assessment of the socio-political implications of a default, enhancing the government's incentive to provide legitimate support.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- A lowering of Fitch's credit view of Inner Mongolia Autonomous Region's ability to provide subsidies, grants or other legitimate resources allowed under China's policies and regulations.

- A significant weakening of the socio-political or financial implications of a default, our assessment of the government's support record or a dilution of the government's shareholding or control.

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].

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

Unless otherwise disclosed in this section, 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