(Repeat for additional subscribers)
July 4 (The following statement was released by the rating agency)
Fitch Ratings has assigned China Huarong Asset Management Co., Ltd. (China Huarong)
Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'A'. The Outlook is
Fitch has also assigned China Huarong's proposed offshore US dollar senior
unsecured notes an expected 'A(EXP)' rating. The notes, to be issued by Huarong
Finance Co., Ltd., are to be unconditionally and irrevocably guaranteed by
Huarong (HK) International Holdings Ltd. (Huarong Hong Kong), a wholly owned
subsidiary of China Huarong.
The final rating on the notes is contingent upon the receipt of final documents
conforming to information already received.
China Huarong has granted a keepwell deed and a deed of equity interest
purchase, investment and liquidity support undertaking to ensure that the
guarantor, Huarong Hong Kong, 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: China Huarong's ratings are linked to China's
sovereign ratings (A+/Stable) and notched one down from the sovereign. This
reflects its ownership by the central government, the state's strong control
over the company via the Ministry of Finance (MOF) and China Banking Regulatory
Commission (CBRC) and China Huarong's strategic ties with the state, which
result in a strong likelihood of extraordinary state support, if needed.
Therefore, China Huarong is classified as a dependent public sector entity under
State Controlling Shareholding: The MOF holds 98.06% of China Huarong while
China Life Insurance (Group) Company, which is wholly owned by the MOF, holds
the remaining 1.94%. Although the MOF may allow strategic investors to take
stakes in China Huarong in the near term by diluting its shareholding, the
ministry will maintain absolute control of the company. In Fitch's view, this
will neither reduce the MOF's likelihood of support nor its absolute control of
Tight Control and Supervision: The MOF controls China Huarong through the
shareholders' meeting and the board of directors, and depends on the board to
hire China Huarong's senior management. The senior management is scrutinised and
approved by the China Banking Regulatory Commission (CBRC), which also has
significant influence on the entity's business operations through industry and
business activity supervision. China Huarong's senior management reports its
operational and financial conditions to the MOF and CBRC on a regular basis.
Strategic Importance: China Huarong is one of four asset management companies
(AMCs) established to mitigate financial risks, preserve state-owned assets, and
promote the reform and development of China's financial system. These AMCs are
also the premium wholesalers of non-performing assets in China.
Leading Position in Industry: China Huarong has the largest consolidated balance
sheet size and the highest net profit at end-2013 among the Big Four AMCs. It is
one of the leading AMCs in terms of the number of debt-to-equity (DES)
transactions completed and market share in distressed asset acquisitions. China
Huarong is also one of two AMCs permitted to access the interbank market and
issue financial bonds in the domestic market.
Risk from Rapid Expansion: The fast growth in China Huarong's distressed asset
portfolio in the past three years raises concerns about execution risks and
potential pressure on its capital adequacy. However, Fitch believes its industry
experience and seasoned management partly mitigate the risk.
Inherent and Concentration Risk: As a distressed asset manager, China Huarong's
portfolio carries more inherent credit risk than a normal loan portfolio.
Concentration risk arises from China Huarong's exposure to the property and
manufacturing sectors in its portfolio. However, the low loan to value ratio of
its distressed receivable portfolio and the significant value appreciation
potential of its DES asset portfolio partly neutralises the concentration risk.
Rating on Proposed Notes: The 'A(EXP)' rating on the offshore bond is in line
with the ratings of China Huarong, given the strong link between Huarong Hong
Kong and China Huarong and the keepwell deed and the deed of equity interest
purchase, investment and liquidity support undertaking, which provide additional
support and transfer the ultimate responsibility of payment to China Huarong.
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 China Huarong to ensure that Huarong Hong Kong has sufficient funds to
honour the proposed debt obligations. The agency also believes China Huarong
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 Huarong Hong Kong could have significant negative
repercussions on China Huarong 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 China Huarong'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 and result in a rating downgrade.