State Development Investment Corp. Assigned #A+# Outlook Proposed Guaranteed US$ Notes Rated #A+#

Stocks and Financial Services Press Releases Tuesday April 18, 2017 17:24
HONG KONG--18 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 18, 2017--S&P Global Ratings said today that it had assigned its 'A+' long-term corporate credit rating to State Development & Investment Corp. (SDIC). The outlook is negative. We also assigned our 'cnAAA' long-term Greater China regional scale rating to the Beijing-based investment holding company.

Meanwhile, we assigned our 'A+' long-term issue rating and our 'cnAAA' long-term Greater China regional scale rating to the U.S.-dollar-denominated senior unsecured notes that Rongshi International Finance Ltd., a special purpose vehicle, proposes to issue. SDIC will unconditionally and irrevocably guarantee the notes. The issue rating is subject to our review of the final issuance documentation.

"The rating on SDIC reflects our view of the company's special status as the primary policy investment vehicle of the Chinese central government and a core platform for the government to execute its pioneer economic and social policies," said S&P Global Ratings credit analyst Leo Hu.

We therefore believe there is an extremely high likelihood that SDIC will receive extraordinary support from the Chinese central government if needed. We assess the company's stand-alone credit profile (SACP) as 'bbb-'.

Our opinion of the likelihood of extraordinary support to SDIC is based on the following company characteristics:

Critical role to the government. SDIC is the primary policy investment vehicle of the Chinese central government. It is a core platform for the government to execute various economic, social, and political policies, especially the reformist policies, on a pioneer basis.

As a result of its very special role, SDIC receives a significant amount of direct funding from central government agencies, as well as funds at preferential costs to support its execution of government policies.Very strong link to the government.

The Chinese central State-owned Assets Supervision and Administration Commission (SASAC) owns 100% of SDIC, and we believe the ownership is unlikely to fall below 50% in the next five years.
We expect SDIC to remain a core platform for the Chinese central government to execute its various economic and social policies through state capital investment and other state capital operations.
This view is derived from the unique purpose for which SDIC was set up, as well as the long-term very close relationship between SDIC and various central government agencies.

In recent years, SDIC has increased its focus on key emerging industry investments (from infrastructure and resources segments earlier), including high-tech and high-end manufacture, in line with the central government's focus on supporting these industries.

SDIC's various investment funds have received more than Chinese renminbi (RMB) 20 billion in contributions from the Ministry of Finance/Social Security Fund, the largest amount among all state-owned enterprises (SOEs).

The significant amount of state funds entrusted to SDIC also demonstrates the overlap of SDIC's operation with the government's policy direction, in our view.
We expect SDIC to remain an investment holding company in view of its strategic objective as mandated by the government.

Although SDIC has close interaction with its investee companies, we believe the investee companies operate autonomously, with SDIC only supervising on key operational, financial, and personnel issues. We expect SDIC will maintain its leverage profile for the next 12-24 months.

The company has a loan-to-value (LTV) ratio of 42.7% as of Dec. 31, 2016, with RMB50 billion in net debt (including guarantees to investees) against a portfolio value of about RMB117 billion. We expect the LTV ratio to remain around or below 45% over the next 12-24 months because we expect SDIC to conduct equity placements and attract third-party equity capital for its investments.

We assess the company's financial risk profile as significant based on the above factors. SDIC's fair business risk profile reflects some concentration in the company's portfolio, with the top three assets accounting for more than 50% of the total portfolio value. Although listed assets contribute about 60% of the portfolio value as of 2016, the still-material amount of non-listed assets affects the portfolio's liquidity.

In addition, some of SDIC's portfolio assets, for example SDIC Power Holdings Co. Ltd., still have high debt leverage. SDIC's very large portfolio size of about US$17 billion as of December 2016 mitigates the risk. Meanwhile, the business risk profile of the company's key portfolio assets is satisfactory, in our view. We assess SDIC's management and governance to be strong.

In our view, the company makes detailed planning for its investments and disposals considering government policy direction as well as the return profiles of the investments.
Despite being able to grow more aggressively, SDIC has historically chosen a more prudent growth path, helping the company maintain its leverage profile.
We view SDIC favorably compared to other investment holding companies with a similar SACP.

The company has a very large asset base, which we expect will further grow as more of portfolio assets get listed in the Chinese and international equity markets. SDIC has also been receiving ongoing government support in the form of favorable borrowing costs or the government's fund injection for industrial development, etc. We expect such ongoing support to continue and remain a positive factor in SDIC's SACP.

We have equalized the rating of the proposed U.S.-dollar notes with the issuer credit rating on SDIC, given the notes are part of the company's senior unsecured obligations as a result of the guarantee.

In addition, we believe the notes are not structurally subordinated to more priority claims of SDIC, as we typically only look at holding-company-level liability for investment holding companies. "The negative outlook on SDIC mainly reflects the outlook on the sovereign credit rating on China," said Mr. Hu. "We expect no change in our assessment of an extremely high likelihood of Chinese government support to SDIC over the next 12-24 months.

We also expect SDIC's SACP to remain stable, with fair portfolio liquidity and portfolio LTV ratio not exceeding 45%." We could downgrade SDIC if we lower the sovereign credit rating on China. We could also downgrade SDIC if the likelihood of Chinese government support to SDIC is less than we expect.

The government developing another platform to perform a similar function as SDIC's, or the government reducing its ownership to notably below 100% would indicate such reduction of support.
In addition, we could downgrade SDIC if we lower the company's SACP to 'b+' or below.
This could be due to the company making very significant debt-funded investments, leading to the LTV ratio exceeding 60% on a sustained basis.
We could revise the outlook on SDIC to stable if we revise the rating outlook on the sovereign to stable.

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