Moody's Investors Service has affirmed the Baa2 issuer rating of Beijing Automotive Group and the Baa2 senior unsecured rating on the bonds issued by BAIC Inalfa HK Investment and guaranteed by BAIC Group.
At the same time, Moody's has changed the outlook on the ratings to negative from stable.
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"The ratings affirmation reflects BAIC Group's high importance to China's automotive industry in terms of scale, contribution to the development of new energy vehicles and leading position among Beijing Municipal Government's state-owned enterprises, in terms of financial scale and fiscal contribution," said Gerwin Ho, a Moody's senior credit officer.
As such, BAIC Group's Baa2 ratings incorporate a three-notch uplift, based on Moody's expectation that the company will receive a high level of extraordinary support from the Beijing Municipal Government, and ultimately the Government of China (A1 stable) through the company's parent, Beijing State-owned Capital Operation and Management Centre (BSCOMC, A1 stable), if needed.
"BAIC Group's proposed investment in Daimler will further solidify the two companies' relationship," added Ho, who is also Moody's lead analyst for BAIC Group.
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"As BAIC Group's key joint venture partner, Daimler is important for BAIC Group's operation and business profile in terms of premium product offerings and profitability."
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By GlobalDataOn 23 July 2019, BAIC Group announced that it acquired a 5% stake in the share capital of Daimler, in the form of a 2.48% direct shareholding and a right to acquire additional voting rights equaling 2.52% of Daimler's share capital.
Moody's expects BAIC Group will fund the consideration from internal resources, borrowings and through other funding channels.
Daimler is one of the world's leading premium passenger car manufacturers through its valuable Mercedes-Benz Cars premium brand, as well as a
global leader in the medium and heavy trucks market, with solid market shares in Europe, Brazil, NAFTA and Japan.
The two companies have cooperated in the production, research and development, as well as sale of passenger vehicles and commercial vehicles in China since the early 2000's. Daimler also has equity stakes in BAIC Group subsidiaries, including BAIC Motor Corporation Limited and BAIC BluePark New Energy Technology.
"At the same time, the negative ratings outlook reflects Moody's view that BAIC Group will need more time to reduce its leverage to a level appropriate for its standalone credit strength – due to the to-be-completed investment in Daimler – and the greater uncertainty over the company's profit growth, because of weak auto demand in China," added Ho.
Moody's estimates that BAIC Group's leverage – as measured by debt/EBITDA – will reach about 6.0x over the next 12 to 18 months, upon the completion of the investment in Daimler, assuming that the transaction is partly debt-funded. This level of leverage will diverge from Moody's previous expectation that leverage will register about 5.0x over the next 12 to 18 months. Such a trend, if it materialises, would be weak for the company's standalone credit strength.
Moody's assessment of BAIC Group's financial metrics is based on its financials after adjusting for the pro rata consolidation of its two key joint venture companies, Beijing Benz Automotive and Beijing Hyundai Motor.
BAIC Group's standalone credit strength is underpinned by its strong competitive position in China's auto market, which mirrors the strength of its two key joint ventures, Beijing Benz Automotive and Beijing Hyundai Motor and (2) diversified product lineup. At the same time, its standalone credit strength is constrained by its geographic concentration in China, as well as its low profitability and high debt leverage.
BAIC Group's access to liquidity as a holding company is manageable.
Moody's believes the group can meet its refinancing requirements, given its ownership by the Beijing Municipal Government, good banking relationships and proven access to the local and offshore capital markets.
As an automaker, BAIC Group is exposed to environmental, social and governance risk. Meeting regional emission requirements, particularly those relating to CO2, is one of the most pressing and challenging objectives facing the auto industry over the medium to long term.
BAIC Group has invested in research and development to develop new energy vehicles (NEVs), including battery electric vehicles, which will help
the company manage environmental risk. During 2018, the company's own brand NEV was one of the leading NEV passenger vehicle makers in
China in terms of unit sales.
BAIC Group maintains transparency through financial reporting disclosures, provided as a result of its issuance of onshore bonds. The company is
under the management oversight of the Beijing State-owned Assets Supervision and Administration Commission via BAIC Group's parent, BSCOMC.
The ratings outlook could return to stable if BAIC Group improves its profitability and financial leverage over the next 12-18 months to levels consistent with its standalone credit strength.
Financial metrics that Moody's would consider for a return to a stable ratings outlook include debt/EBITDA trending below 6.0x over the next 12-18 months.
Downward ratings pressure could emerge, if BAIC Group exhibits weakening sales or falling profitability; expands its capacity rapidly or undertakes debt-funded acquisitions, such that debt/EBITDA fails to trend down to 6.0x or below over the next 12-18 months; or faces substantial changes in its joint venture relationships, in particular those with Hyundai Motor Company (Baa1 negative) and Daimler.
Any indications of weaker parental support for BAIC Group could also be negative for the ratings.
