November 30, 2017 / 6:51 AM / 17 days ago

Fitch Affirms Chailease Finance at 'BBB-' and Fina Finance at 'A(twn)'

(The following statement was released by the rating agency) TAIPEI, November 30 (Fitch) Fitch Ratings has affirmed Taiwan-based Chailease Finance Co, Ltd.'s Long-Term Issuer Default Rating (IDR) at 'BBB-' and National Long-Term Rating at 'A(twn)'. Fitch has also affirmed the National Long-Term Rating on Chailease's major subsidiary, Fina Finance & Trading Co., Ltd, at 'A(twn)'. The Outlook is Stable. A full list of the rating action is available at the end of this commentary. KEY RATING DRIVERS Chailease's IDRs and the Stable Outlook are supported by the company's solid franchise and leading market position in equipment leasing and instalment financing in Taiwan. Chailease has sustained a resilient business model, underpinned by strong management depth and domain knowledge, effective risk management and healthy profitability through economic cycles. These factors are counterbalanced by the risk profile of Chailease's small- to-medium enterprise (SME) target market, sensitivity to economic cycles, sustained high portfolio growth and reliance on wholesale funding. Fina's National Long-Term Rating is in line with that of Chailease, reflecting its status as a core operation of Chailease. Fina and Chailease operate on a consolidated basis, with a high level of management and operational integration. Fitch sees Fina's specialisation in leasing for construction machinery and equipment and transportation vehicles as an important extension of Chailease's SME financing business. Chailease supplements banks in providing funding to SMEs in Taiwan. It has established a risk-management framework especially for the SME sector, which help to minimise its actual loss ratio. The business is diversified, with no single sector representing more than 10% of Chailease's total portfolio, while the 10 largest clients accounted for only 12% of equity at end-1H17. Chailease's consolidated debt/tangible equity ratio has remained stable at 5x for the past four years. Fitch expects the company to maintain an adequate capital profile, with a consolidated equity/asset ratio of 14%-15% over the medium term, supported by its healthy profitability and plans to retain more earnings for capital to support a pick-up in growth in Taiwan or potentially on a group-wide basis. Chailease has consistently managed its volatile asset quality well. Its consolidated impaired ratio escalated to 3.8% in 2016 and 1H17, from 2.5% at end-2014, amid Taiwan's weak economy. Chailease's real-estate exposure and Fina's construction equipment and heavy-vehicle lending are susceptible to the weak economic environment. This increased credit cost to 140bp-170bp in 2016 and 1H17, higher than 110bp average in 2013-2015. However, expected actual losses remain manageable, underpinned by strong recovery prospects. Chailease has diverse funding sources, but relies on short-term borrowing to fund its leasing activities for cost consideration, introducing refinancing risk. Taiwan's strong liquidity environment and stable banking system benefit this strategy. The company has made limited usage of secured debt and is strengthening its liquidity management, which requires its one-year liquidity shortfall to be fully covered by cash and committed credit lines. It is also shifting its commercial paper maturity toward a longer term; that is, three months to one year, from its earlier higher proportion due in one month. Chailease's senior unsecured debt is rated at the same level as its National Long-Term Rating, in line with Fitch's rating criteria for senior unsecured bond instruments. The debt constitutes the company's direct, unconditional and unsecured obligation. Fina's credit profile has been stable despite its asset quality being susceptible to economic cycles. The company maintains moderate leverage, with its equity/asset ratio sustained at 15%-20%. Refinancing risk stemming from Fina's high reliance on short-term funding - mainly commercial paper - is mitigated by its adequate unused committee credit facilities. RATING SENSITIVITIES Negative rating action on Chailease would result from excessive risk taking without commensurate capital enhancement or a compromise in underwriting discipline. Deterioration in the company's competitive position or the group's financial strength could also pressure its ratings. Fitch may consider upgrading Chailease's rating if the company demonstrates competitive advantage and pricing power while expanding its new business venture. Any change to the ratings of Chailease, whether positive or negative, will affect the ratings of Fina to the same magnitude. Fina's ratings are also sensitive to a change in Fitch's assumption around Chailease's propensity to support the subsidiary. Fina's ratings may be downgraded from any weakening in the linkages between Fina and its parent, including lower importance of Fina within the group. Any rating action on Chailease will trigger a similar move on its debt ratings. The rating action is 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 affirmed at 'A(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F1(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 Katie Chen Director +886 8175 7614 Committee Chairperson Mark Young Managing Director +44 20 3530 1318 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. 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