RPT-Fitch assigns 'A-' ratings to China Orient Asset Management; outlook stable
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Sept 6 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned China Orient Asset Management Corporation (COAM) Long-Term Foreign and Local Currency Ratings of 'A-' with a Stable Outlook.
Fitch has also assigned COAM's proposed offshore USD senior unsecured notes an expected 'A-(EXP)' rating. The notes, to be issued by Century Master Investment Co. Ltd., are to be unconditionally and irrevocably guaranteed by China Orient Asset Management (International) Holding Limited (COAMI), a wholly owned subsidiary of COAM.
In place of a guarantee, COAM has granted a keepwell deed and a deed of equity interest purchase and investment undertaking to ensure that the guarantor, COAMI, has sufficient assets and liquidity to meet its obligations under the guarantee for the proposed USD notes.
The final rating on the notes is contingent upon the receipt of final documents conforming to information already received.
Key Rating Drivers
COAM's ratings are linked to China's sovereign rating ('A+'/Stable) and rated two notches below. This reflects its central government ownership, and strong operational and strategic ties with the government, resulting in a strong likelihood of extraordinary government support if needed. They also take into account dilution of the policy role and expected reduction in shareholding by the government. COAM is therefore classified as a dependent public sector entity under Fitch's criteria.
The government, though the Ministry of Finance (MoF) owns 100% of COAM. The MoF provided initial capital contribution of CNY10bn and the central bank also provided subsidised loans to COAM on establishment. In addition, Fitch expects that COAM's ultimate losses on the purchase and disposal of policy-oriented non-performing assets (NPA) will be borne by the Ministry of Finance (MoF). It is expected that the MoF will dilute its shareholding in COAM in the near future but still maintain a majority stake.
Without a board of directors, COAM's major strategic decisions are made by the MoF and the daily operations are managed by the president, along with seven other managers appointed by the China Banking Regulation Commission (CBRC). The latter acts as regulator for COAM's asset management activities. The management needs to report their operational and financial conditions on a quarterly basis to the MoF and CBRC, and submit the annual operational and financial results to the MoF.
In the past five years, COAM rapidly diversified its business into insurance, securities, trust, finance leasing etc. Although the diversification of business lines can smooth out the volatility in profit and leverage COAM's extensive client base and network, execution risk also rises along with the fast expansion.
Concentration risk arises from COAM's exposure to the Chinese property market, representing around 78% of its account and loan receivable portfolio by the end of 2012. However, one mitigating factor is most of its outstanding portfolio is either guaranteed by a third party or secured by assets with loan to value ratio less than 40%.
COAM is mainly funded by short term borrowings while the maturity of its NPA portfolio could be relatively prolonged. Nevertheless, the large outstanding credit facilities as well as its good long term relationship with various banks and financial institutions - to some extent - mitigate the risks arising from mismatched assets and liabilities.
The 'A-(EXP)' rating to the offshore bond is in line with the ratings of COAM given the strong link between COAMI and COAM and also the keepwell deed and the deed of equity interest purchase and investment undertaking which provides additional support and which transfers the ultimate responsibility of payment to COAM.
In Fitch's opinion, both the keepwell deed and the deed of equity interest purchase and investment undertaking signal a strong intention from COAM to ensure that COAMI has sufficient funds to honour the proposed debt obligations. The agency also believes COAMI intends to maintain its reputation and credit profile in the international offshore market, and is unlikely to default on offshore obligations. Additionally a default of COAMI could have significant negative repercussions on COAM for any future offshore funding.
COAM is one of the four asset management companies owned by the MoF, established with the mission of preserving state owned assets, preventing and defusing financial risks and promoting reforms of state owned entities. COAM, together with the other three state owned asset management companies, are also the premium wholesalers for NPA under the new policy which grants them privileges in transferring bulk NPAs and acquiring NPA across different regions in China.
A positive rating action would stem from a similar change in the ratings of the sovereign and / or a stronger explicit and implicit support from government. Material changes to its strategic importance or a dilution in the government shareholding to less than 51% could result in the entity no longer being classified as a dependent public sector entity and therefore no longer credit-linked to the sovereign rating, which may result in ratings downgrade.
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