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Fitch Affirms Chailease Finance at 'BBB-'; Upgrades Fina Finance to 'A(twn)'
December 1, 2016 / 7:21 AM / in a year

Fitch Affirms Chailease Finance at 'BBB-'; Upgrades Fina Finance to 'A(twn)'

(The following statement was released by the rating agency) TAIPEI, December 01 (Fitch) Fitch Ratings has affirmed Taiwan-based Chailease Finance Co, Ltd.'s (Chailease) Long-Term Issuer Default Rating (IDR) at 'BBB-' and National Long-Term Rating at 'A(twn)'. Fitch has also upgraded the National Long-Term Rating on its major subsidiary, Fina Finance & Trading Co., Ltd (Fina), to 'A(twn)' from 'A-(twn)'. The Outlook on the ratings is Stable. A full list of the rating actions is available at the end of this commentary. KEY RATING DRIVERS IDRS, NATIONAL RATINGS AND SENIOR DEBT Chailease's IDRs and Stable Outlook reflect its solid franchise in leasing and instalment financing in Taiwan; its resilient business model that is underpinned by the company's strong management depth and domain knowledge; effective risk management; and its healthy profitability through economic cycles. The ratings also consider the inherent cyclicality of its SME focus, its reliance on wholesale funding, and the group's large exposure to the more volatile China market through its sister company. The upgrade of Fina' ratings is underpinned by the stronger integration of the treasury management functions of Chailease and Fina that was initiated in early 2016. Fina's National Long-Term Rating is now in line with that of Chailease, which reflects its status as a core operation of Chailease. Fitch views Fina's specialisation in leasing for construction machinery/equipment and transportation vehicles as an important extension of Chailease's SME financing business. Chailease supplements banks in providing financing to SMEs in Taiwan. The majority of its clients are existing customers of banks, but the company is able to differentiate itself from banks via product innovation, structure flexibility and quick response time. Chailease's business is diversified with no single sector representing more than 10% of its total portfolio, while its 10 largest clients accounted for less than 3% of the total portfolio. Chailease's profitability has weakened, with annualised return on assets declining to 3.1% in 1H16 from 3.3%-3.8% during 2012-2015. This was the result of slower economic activity, which reduced leasing portfolio growth and increased credit costs. Its consolidated impaired-assets ratio increased to 3.5% at end-1H16 from 2.5% at end-2014, driven primarily by Chailease's real estate and Fina's construction equipment/machinery exposure. However, the impairment ratios have remained manageable and moderate relative to its long-term historical experiences. Fitch believes the company's sound risk control, including effective pricing for risks, strong collateral protection, well-diversified exposure and adequate provisions, will mitigate risks arising from the weak economic environment. Fitch expects Chailease to maintain an adequate capital profile with equity-to-assets ratio at 14%-15% over the medium term, supported by its healthy profitability and higher earnings retention. In addition, the management has slowed its asset growth in the face of economic weakness in both Taiwan and China (via its sister company), which should ease capital pressure in the medium term. Chailease is reliant on wholesale funding and has a negative short-term funding gap as it takes advantage of the strong liquidity environment and stable banking system in Taiwan. The company's funding and liquidity profile are generally stable, supported by diverse sources of funding and limited usage of secured borrowing, which help mitigate liquidity and refinancing risks. Chailease has maintained adequate repayment ability with the ratio of unencumbered assets to unsecured debt above 1x, and it has reasonable contingency funding plans. Fitch views Chailease's interest-rate risk as manageable given the reasonably short duration of its assets, with about one third of the portfolio due in a year. Foreign-exchange risks are low, in our view. Chailease's senior unsecured debt is rated the same level as its National Long-Term Rating, in line with Fitch's rating criteria on senior unsecured bond instruments. The debt constitutes direct, unconditional, and unsecured obligations of the company. Fina's underlying profitability has been steady following the completion of an intra-group business re-alignment since 2013 that included the transfer of Chailease's vehicle-financing business to Fina. Asset quality remains susceptible to economic cycles, but is manageable given its satisfactory provisioning, sound collateral protection, strong recovery and adequate profit buffer against credit cost. The company maintains a moderate leverage profile with equity-to-assets ratio sustained at a 20% level. Refinancing risk due to Fina's high reliance on short-term funding, mainly commercial paper, is mitigated by adequate unused committed credit lines. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT A rating upgrade for Chailease is less likely in the near term as Chailease group's credit profile is constrained by its susceptibility to higher risks in emerging markets and appetite for growth, although this has been moderating in the economic slowdown. Negative rating action would result from excessive growth without commensurate capital enhancement, or any compromise in underwriting discipline. Deterioration in the company's competitive position and the group's financial strength could also pressure its ratings. Fina's ratings are closely linked with those of Chailease. Negative rating action could result from any weakening in the links between Fina and its parent, including ownership dilution and reduced importance of Fina within the group. Any rating action on Chailease would trigger a similar move on Fina's ratings. Any rating action on Chailease is likely to trigger a similar move in its debt ratings. The rating actions are as follows: Chailease Finance Co, Ltd. Long-Term IDR affirmed at 'BBB-'; Outlook Stable Short-Term IDR affirmed at 'F3' National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F1(twn)' Senior unsecured debt affirmed at 'A(twn)' Fina Finance & Trading Co., Ltd National Long-Term Rating upgraded to 'A(twn)' from 'A-(twn)'; Outlook Stable National Short-Term Rating upgraded to 'F1(twn)' from 'F2 (twn)' Contact: Primary Analyst Shirley Hsu Associate Director +886 2 8175 7606 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13F, Tun Hwa N. Rd., Taipei Secondary Analyst Leo Wah Director +852 2263 9951 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable. 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