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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 Stable.
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 Fitch's criteria.
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 the company.
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.