Tianjin Infrastructure And Tianjin Rail Transit Group Outlook Revised To Negative; Ratings Affirmed

  • We see a risk that the Tianjin government's financial capacity to provide extraordinary support to Tianjin Infrastructure Construction & Investment Group Co. Ltd. (TJII) and Tianjin Rail Transit Group Co. Ltd. (TRT) could weaken over the next 12 months.
  • The likelihood of these companies receiving extraordinary support from Tianjin in distressed scenarios remains almost certain.
  • On April 1, 2019, S&P Global Ratings revised its rating outlook on TJII and TRT to negative from stable. We affirmed our 'BBB+' long-term issuer credit rating on TJII and our 'A-' long-term issuer credit rating on TRT. We also affirmed our 'BBB+' long-term issue rating on TJII's senior unsecured notes.
  • The negative outlook reflects our view that Tianjin's ongoing structural economic and SOE reforms could pressure the city's growth prospects, budgetary deficit, and debt burden over the next 12 months.
SINGAPORE (S&P Global Ratings) April 1, 2019--S&P Global Ratings today took 
the rating actions listed above.

We revised our outlook on TJII and TRT to reflect the risk that the Tianjin 
municipal government's financial capacity to provide extraordinary support to 
the companies could weaken over the next 12 months. The city's countercyclical 
fiscal measures to weather a growth slowdown, and its deleveraging efforts 
could lead to rising underlying debt burden relative to revenues.

In our view, Tianjin city is pushing through structural economic and 
state-owned enterprise (SOE) reforms to diversify its economy away from 
traditional heavy industries and deleverage the public sector. Although this 
benefits growth prospects over the long run, in the meantime, we expect 
Tianjin's growth slowdown will persist for some time. Combined with Tianjin's 
countercyclical fiscal measures, this could lead to wider deficits and a 
rising underlying debt burden.

We affirmed our ratings on TJII and TRT because we believe the companies' 
credit profile continues to be underpinned by support from the Tianjin 
government. The likelihood of these companies receiving extraordinary support 
from Tianjin in distressed scenarios remains almost certain.

As the largest local government financing vehicle (LGFV), TJII is Tianjin's 
sole platform for developing and operating major infrastructure projects in 
the central urban area. It has developed the majority of Tianjin's toll roads, 
expressways, water treatment plants, and underground pipelines, and owns 
86.34% shares in TRT. Tianjin owns 100% of TJII and has full control and 
oversight of the company's business, financial, and operational strategies. 
Tianjin has incorporated a significant portion of TJII's debt as local 
government-related debt, and has consistently supported the capital 
expenditure and operations of TJII's key infrastructure projects through its 
own fiscal budget.

TRT is Tianjin's major platform for the investment and operation of metro 
system, an essential public service that cannot be easily undertaken by 
private enterprises. The Tianjin government is unlikely to divest its full 
ownership in TRT, given the company's not-for-profit public welfare nature and 
mandate to expand Tainjin's metro network beyond 500 kilometers. In addition, 
the government plays a decisive role in TRT's strategic direction, business 
operations, and project financing. It maintains a record of allocating 40%-50% 
capital of TRT's metro investments from the fiscal budget, and recently 
acknowledged substantial proportion of TRT's borrowing as its hidden debt.

We believe TJII's likelihood of receiving government extraordinary support in 
case of financial distress is weakening over time. This reflects our long-term 
view on the central government's policy direction toward clearer separation 
between local governments and LGFVs. That said, TRT will be less vulnerable to 
such development in our view. Its operations are backed by the strong 
long-term financing support from the government and banking system due to its 
essential public-service nature and the metro system's importance to Tianjin.


TIANJIN INFRASTRUCTURE CONSTRUCTION & INVESTMENT GROUP CO. LTD.
The negative outlook on TJII reflects our expectation that Tianjin's slowdown 
in structural economic growth will persist. This combined with the city's 
proactive countercyclical measures may further constrain revenue growth and 
result in wider budget deficits. Consequently, the government's tax-supported 
debt will likely continue to build up faster than its operating revenue, 
raising the municipality's debt burden.

We also expect the company's likelihood of receiving extraordinary support 
from Tianjin in a distress scenario to be almost certain in the same period, 
but such support will weaken over time, mainly due to China's policy direction 
of gradually separating LGFVs from their local governments.

We could lower the rating on TJII if we believe the creditworthiness of the 
Tianjin government has materially deteriorated. This could happen if the 
city's budget deficit is set to widen further beyond 15% of adjusted total 
revenues, and if the government fails to stabilize its debt level relative to 
revenues over the next 12 months. 

Another trigger for a downward rating action may come from the Tianjin 
government's larger contingent risks than we expect due to exposure to the SOE 
sector and to Tianjin's lower-tier governments.

We could also lower the rating on TJII if we believe the likelihood of 
extraordinary government support to the company has materially diminished 
because of a shift in the government's strategies or priorities. A significant 
increase in the growth of the proportion of competitive businesses, weakened 
control, or a reduction of the government's ownership in the company could 
indicate declining support and commitment.

We may revise the outlook to stable if we see structural improvement in 
Tianjin's economic and fiscal profile, or an effective de-risking of the SOE 
sector, which could result in a meaningful reduction in fiscal deficit or 
stabilizing debt burden. All of this is subject to our expectation that 
extraordinary government support to TJII will remain unchanged.

TIANJIN RAIL TRANSIT GROUP CO. LTD.  
The negative outlook on TRT reflects our expectation that Tianjin's structural 
economic growth slowdown will persist. This combined with the city's proactive 
countercyclical measures may further constrain revenue growth and result in 
wider budget deficits. Consequently, the government's tax-supported debt will 
likely continue to build up faster than its operating revenue, raising the 
municipality's debt burden. 

We also expect TRT to continue to receive almost certain extraordinary support 
from the government because of its essential role in executing the city's 
long-term urban transport development plan and its status as a public service 
provider.

We could lower the rating on TRT if the creditworthiness of the Tianjin 
municipal government weakens, in our view. This would occur if the city's 
budget deficit widens further beyond 15% of adjusted total revenues, and if 
the government fails to stabilize its debt relative to revenues over the next 
12 months. A downward rating action could be triggered by larger-than-expected 
contingent risks due to exposure to the SOE sector and to Tianjin's lower-tier 
governments.

We may also lower the rating on TRT if we believe the government's commitment 
to support the company has weakened because of a change in the government's 
strategies or priorities. While we believe such a scenario is unlikely, a 
material delay in the disbursement of funding support, weakened control, or a 
meaningful reduction of the government's ownership in the company would 
indicate weakening government commitment.

We may revise the outlook to stable if we see structural improvement in 
Tianjin's economic and fiscal profile, or an effective de-risking of the SOE 
sector, which could result in a meaningful reduction in fiscal deficit or 
stabilizing debt burden. All of this is subject to our expectation that 
extraordinary government support to TRT will remain unchanged.

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