Beijing Enterprises Holdings Limited -- Moody's assigns Baa1 to Beijing Enterprises Holdings' proposed guaranteed bonds

Rating Action: Moody's assigns Baa1 to Beijing Enterprises Holdings' proposed guaranteed bondsGlobal Credit Research - 27 Apr 2021Hong Kong, April 27, 2021 -- Moody's Investors Service has assigned a Baa1 rating to the proposed senior unsecured guaranteed bonds to be issued by Talent Yield International Limited. The notes will be unconditionally and irrecoverably guaranteed by Beijing Enterprises Holdings Limited (BEHL, Baa1 stable).The outlook is stable.The proceeds from the senior unsecured notes will be used to refinance existing debts and for general corporate purposes.RATINGS RATIONALE"The Baa1 senior unsecured rating on the guaranteed bonds reflects the irrevocable and unconditional guarantee from BEHL," says Boris Kan, a Moody's Vice President and Senior Credit Officer.Obligations under the guaranteed bonds will rank pari passu with BEHL's all other senior unsecured obligations.The proposed senior unsecured guaranteed bonds -- if they are issued as planned -- will not have a material impact on BEHL's overall credit profile because the scale of the issuance will be manageable for BEHL.BEHL's Baa1 issuer rating incorporates: (1) its standalone credit strength; and (2) a four-notch uplift, based on Moody's expectation of extraordinary support from the Beijing municipal government and the Government of China (A1 stable) through BEHL's ultimate parent, Beijing Enterprises Group Company Limited (BE Group), in times of need.BEHL's standalone credit profile is supported by the company's diversified business portfolio and the stable cash flows from its monopoly and leading positions in the less-cyclical gas and water treatment businesses that back the group's rapid expansion, given the supportive government policies for the two sectors and rising environmental awareness in China.On the other hand, BEHL's standalone credit profile is constrained by (1) the company's high leverage driven by acquisitions and investments, (2) its heightened business risks arising from its overseas investments, and (3) the uncertainty regarding the future dividend policies of PetroChina Beijing Pipeline Co., Ltd (Beijing Pipeline) after Kunlun Energy Company Limited (A2 stable) transferred its 60% equity interest in Beijing Pipeline to China Oil & Gas Pipeline Network Corporation (PipeChina, not rated).The support assessment reflects BEHL's (1) dominant role in the local natural gas and water utility sectors, which are commercially viable but are linked to the public policy goals of the Beijing municipal government and the central government; and (2) majority ownership by BE Group, which is 100% owned by the Beijing municipal government.The rating also considers the following environmental, social and governance (ESG) factors.BEHL's city gas distribution segment is the company's biggest earnings contributor and plays an important role in the government's air pollution control plan. Specifically, the Chinese government targets to increase natural gas consumption to 15% of its primary energy mix by 2030 from about 8% in 2019.In addition, BEHL's operations are also exposed to worker health and safety risks in relation to its construction and operation of city gas projects and waste water treatment facilities. These risks are mitigated by the long track record of the company and the experience of the management.While BEHL's financial policy is characterized by policy-driven expansions, including overseas investments with higher volatilities than its core domestic city gas business, this concern is mitigated by the tight supervision by the BE Group and ultimately the Beijing municipal government, as well as the company's status as a listed company in the Hong Kong Stock Exchange.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGThe stable outlook primarily reflects Moody's expectation that BEHL will maintain its overall credit profile and will keep further expansions and acquisitions at a manageable scale over the next one to two years.Moody's could upgrade BHEL's issuer rating if the company's standalone credit profile improves significantly. Indicators of improvement in BHEL's standalone credit profile include (1) successful deleveraging by the company over time, or (2) favorable regulatory changes for its core gas and water segments.The financial metrics for an upgrade of BHEL's standalone credit profile include (1) adjusted funds from operations (FFO)/interest coverage above 5x; (2) retained cash flow (RCF)/debt above 15%; or (3) adjusted debt/book capitalization below 45% for a sustained basis. All financial metrics are based on the pro-rata consolidation of Beijing Enterprises Water Group Limited, which was 41.1% owned by BEHL as of December 2020.On the other hand, Moody's could downgrade BEHL's ratings if (1) the likelihood of support from the BE Group or the Beijing municipal government decreases, or (2) BEHL's standalone credit profile weakens significantly.Downward pressure on BEHL's standalone credit profile could arise if (1) the company pursues further large debt-funded expansions or investments; (2) there are significant adverse changes to the regulatory regime that hurt the company's profitability and cash flow; or (3) dividend income from its 40% equity stake in Beijing Pipeline declines significantly over a prolonged period.Financial indicators that would point to a downgrade of BEHL's standalone credit profile include (1) adjusted FFO interest coverage below 2.5x, (2) RCF/debt below 8%, or (3) adjusted debt/book capitalization in excess of 60% over a prolonged period.The principal methodology used in this rating was Investment Holding Companies and Conglomerates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125855. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Beijing Enterprises Holdings Limited (BEHL) is 62.1% controlled by Beijing Enterprises Group Company Limited (BE Group), which is 100% owned by the Beijing municipal government and supervised by the Beijing State-owned Assets Supervision and Administration Commission (SASAC).BEHL is an investment holding company. The company operates in four business segments across China: (1) piped gas operations, (2) brewery operations, (3) equity investments in sewage and water treatment services, and (4) solid waste treatment operations. In 2020, the company reported HKD8.0 billion in profit before tax (excluding corporate expenses), of which 71% was from gas-related businesses, 4% from brewery operations, 22% from sewage and water treatment services, and 3% from solid waste treatment operations.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. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. 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