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April 29 (The following statement was released by the rating agency)
Fitch Ratings has assigned China Cinda Asset Management Co., Ltd. (Cinda) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'A'. The Outlook is Stable.
Fitch has also assigned Cinda's proposed offshore US dollar senior unsecured notes an expected 'A(EXP)' rating. The notes, to be issued by China Cinda Finance (2014) Limited, are to be unconditionally and irrevocably guaranteed by Well Kent International Investment Company Limited (Well Kent), a wholly owned subsidiary of Cinda.
The final rating on the notes is contingent upon the receipt of final documents conforming to information already received.
Cinda has granted a keepwell deed and a deed of equity interest purchase, investment and liquidity support undertaking to ensure that the guarantor, Well Kent, has sufficient assets and liquidity to meet its obligations under the guarantee for the proposed US dollar notes.
KEY RATING DRIVERS
Rating Linked to Sovereign: Cinda's ratings are linked to China's sovereign ratings (A+/Stable) and notched one down from the sovereign. This reflects its central state ownership, the state's strong control over the company via the Ministry of Finance and China Banking Regulatory Commission (CBRC) and Cinda's strategic ties with the state, which result in a strong likelihood of extraordinary state support, if needed. Therefore, Cinda is classified as a dependent public sector entity under Fitch's criteria.
Strong Control and Supervision: The state, through the Ministry of Finance holds 67.84% of Cinda and is the controlling shareholder of the entity. The National Social Security Fund, which is managed by the central government, also holds 8.19% of Cinda. All major decisions and resolutions are reported to the state for approval and senior management executives are appointed by the ministry through the board. The management reports operational and financial conditions to the Ministry of Finance and CBRC on a regular basis.
Strategic Importance: Cinda is one of four asset management companies (AMCs) established to prevent and defuse financial risks, preserve state-owned assets and promote the reform of the financial system in China. These AMCs are also the wholesalers for non-performing assets (NPAs) under a policy that grants the companies privileges in both transferring bulk NPAs and acquiring NPAs in different regions of China.
Leading Industry Position: Cinda led in terms of total revenue, net profit and net assets among the big four AMCs in 2013. Its accumulated distressed asset acquisition and cash recovery also accounted for 35.5% and 38.3% of the aggregate of big four AMCs at end-2012. Moreover, it is the first AMC allowed by CBRC to acquire distressed assets from non-financial enterprises and one of two AMCs that have been granted permission by the central bank to access the interbank market.
Risk from Rapid Expansion: The rapid growth in Cinda's distressed asset portfolio in the past three years raises concerns over operational risks and potential pressure on its capital adequacy despite its recent IPO. However, Fitch believes its industry experience and seasoned management partly mitigate the risk.
Inherited and Concentration Risk: As a distressed asset manager, Cinda's portfolio carries more inherited credit risk than a normal loan portfolio. Concentration risk also arises from Cinda's exposure to the Chinese property and coal mining sectors, which account for a meaningful portion of its distressed receivable portfolio and of its debt-to-equity swap (DES) asset portfolio at end-2013. However, the low collateral ratio (40%) of Cinda's distressed receivable portfolio and the high potential of value appreciation of its DES asset portfolio partly neutralise the concentration risk.
Mismatched Asset and Liabilities: Cinda is mainly funded by short- to medium-term borrowings, while its distressed asset portfolio has a medium- to long-term maturity. However, the company's large outstanding credit facilities and long-term relationships with various banks and financial institutions partly mitigate the risks arising from the mismatch in assets and liabilities.
The 'A(EXP)' rating on the offshore bond is in line with the ratings of Cinda, given the strong link between Well Kent and Cinda and also the keepwell deed and the deed of equity interest purchase, investment and liquidity support undertaking, which provides additional support and which transfers the ultimate responsibility of payment to Cinda.
In Fitch's opinion, both the keepwell deed and the deed of equity interest purchase, investment and liquidity support undertaking signal a strong intention from Cinda to ensure that Well Kent has sufficient funds to honour the proposed debt obligations. The agency also believes Cinda 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 Well Kent could have significant negative repercussions on Cinda for any future offshore funding.
A positive or negative rating action could stem from a similar change in the ratings of the sovereign. Also stronger explicit support could result in an equalisation of the rating with the sovereign.
However, significant dilution of Cinda's core activities in the purchase and management of non-performing assets could lead to a widening in the notching from the sovereign's rating.
Significant changes to its strategic importance or a dilution of state shareholding to below 51% could result in it no longer being classified as a dependent public sector entity and, therefore, no longer credit-linked to the sovereign rating.