Shanxi Road & Bridge Construction Group 'BB-' Ratings Affirmed; Outlook Stable

  • The nationwide moratorium on toll collection will reduce the cash flow of Shanxi Road & Bridge Construction Group Co. Ltd. (SXRB) in 2020. However, the impact is likely to be manageable due to the segment's small contribution to SXRB's revenue.
  • SXRB's liquidity remains less than adequate due to the company's large debt maturities and capital expenditure (capex) over the next 12 months.
  • On March 26, 2020, S&P Global Ratings affirmed its 'BB-' long-term issuer credit rating on SXRB, a 100% subsidiary of Shanxi Transportation Holdings Group Co. Ltd. (SXTH).
  • The stable outlook reflects our expectation that SXRB will be able to manage the impact of the toll moratorium in 2020 and remain a strategically important subsidiary of SXTH over the next 12 months.
HONG KONG (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above. We affirmed the rating on SXRB because we expect the company to manage its short-term liquidity requirements. This is despite reduced revenue after a moratorium on road toll collection in China following the COVID-19 outbreak.
We continue to assess SXRB's stand-alone credit profile at 'b-', and believe the company's role as a strategically important subsidiary of SXTH will stay over the next 12 months. SXTH is the large state-owned enterprise (SOE) controlled by the Shanxi provincial government and primarily engaged in highway development in the province.
SXRB's liquidity is less than adequate, in our view. The company's large debt maturities and capex will continue to add pressure on its liquidity position over the next 12 months. In particular, SXRB has about Chinese renminbi (RMB) 15.5 billion principal repayments due in 2020. This represents close to a quarter of its total outstanding debt.
The revenue loss due to the toll moratorium will further strain SXRB's liquidity. However the company's progress in refinancing maturing debt, its reasonable access to credit market, and a likely lifeline from the parent if needed should provide some cushion for its liquidity.
SXRB's business model heavily depends on debt financing to sustain its highly leveraged capital structure. The company has been transforming from primarily an engineering and construction (E&C) company for road construction to focus on a broader scope of construction, investment, and operation of highways, mainly in the Shanxi province.
SXRB's ability to access bank facilities and the bond market will be key to its liquidity and credit profile. The company is actively tapping the market to meet its refinance needs. It has refinanced about RMB6 billion until mid-March, 2020. This includes a RMB1.35 billion private placement closed in March with a coupon rate less than 5% for a two-year tenor.
We estimate the nationwide moratorium on toll collection will reduce the company's cash flow by RMB920 million in 2020. However, the hit to SXRB is smaller than for most other toll-road operators in China. As of end-2019, SXRB has three toll roads that contribute about 10% to the company's revenue and 22% to its EBITDA.
We forecast a 50% drop in SXRB's toll revenue in 2020, based on our assumption that the toll moratorium will be in force until the middle of the year. Lower traffic volumes due to the novel coronavirus outbreak and the extended toll-free period on passenger cars during the Chinese Lunar New Year would also reduce toll revenue.
SXRB's operating margin is likely to compress temporarily in 2020 because the company's toll-road operating costs are mainly staff-related. We believe SXRB has limited ability to reduce labor costs due to the lack of flexible compensation arrangements and potential negative social implications for such adjustments.
In our opinion, the China government could unveil supportive measures to help ease toll operators' financial strain over the longer term. However, we have not factored these in our base case.
Our analysis also does not factor any direct financial support from the parent. We expect SXTH to coordinate with creditors and share part of its bank facilities with SXRB, if the subsidiary were under financial stress.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak in June or August, and we are using this assumption in assessing the economic and credit implications. We believe measures to contain COVID-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers (see "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now" and "COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure," published on March 17). As the situation evolves, we will update our assumptions and estimates accordingly.
The stable outlook reflects our expectation that SXRB will remain a strategically important subsidiary of SXTH in the next 12 months, and receive timely support from the parent. We believe SXRB will be able to manage its liquidity needs through timely access to banks and capital markets.
We could downgrade SXRB if its capital structure worsens and liquidity position weakens significantly. This could happen if: (1) the company's debt maturity profile shortens; and (2) its banking relationship or access to capital markets deteriorates significantly, such that its funding costs go up or its dependence on short-term or off-balance-sheet funding alternatives increases.
We could also downgrade SXRB if its status within the group diminishes significantly, for example, if SXRB ceases to be the primary road constructor in the province.
We see low chance of a rating upgrade over the next 12 months, given SXRB's high leverage and less than adequate liquidity.
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