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Sept 26 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned China Orient Asset Management Corporation’s (COAM; A-/Stable) USD600m 4.75% senior unsecured notes due 2018 a final rating of ‘A-'.
The notes, issued by Century Master Investment Co. Ltd., are unconditionally and irrevocably guaranteed by China Orient Asset Management (International) Holding Limited (COAMI), a wholly owned subsidiary of COAM.
In place of a guarantee, COAM has granted a keepwell deed and a deed of equity interest purchase and investment undertaking to ensure that the guarantor, COAMI, has sufficient assets and liquidity to meet its obligations under the guarantee for the USD notes.
The ‘A-’ rating to the offshore bond is in line with the ratings of COAM, given the strong link between COAMI and COAM and also the keepwell deed and the deed of equity interest purchase and investment undertaking, which provide additional support and which transfer the ultimate responsibility of payment to COAM.
In Fitch’s opinion, the deeds signal a strong intention from COAM to ensure that COAMI has sufficient funds to honour the debt obligations. The agency also believes COAMI intends to maintain its reputation and credit profile in the international offshore market, and is unlikely to default on offshore obligations. Additionally a default by COAMI could have significant negative repercussions on COAM for any future offshore funding.
The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 6 September 2013.
COAM is rated two notches below the China sovereign (A+/Stable), reflecting ownership by the central government, and strong operational and strategic ties with the government, resulting in a strong likelihood of extraordinary government support if needed. COAM’s rating also takes into account dilution of the policy role and expected reduction in shareholding by the government. COAM is therefore classified as a dependent public sector entity under Fitch’s criteria.
The government, through the Ministry of Finance (MoF) owns 100% of COAM. The MoF provided initial capital contribution of CNY10bn and the central bank also provided subsidised loans to COAM on establishment. In addition, Fitch expects that COAM’s ultimate losses on the purchase and disposal of policy-oriented non-performing assets (NPA) will be borne by the MoF.
COAM has no board of directors and its major strategic decisions are made by the MoF. Daily operations are managed by a president, along with seven other managers appointed by the China Banking Regulation Commission (CBRC), which regulates COAM’s asset management activities. The management needs to report on operational and financial conditions on a regular basis to the MoF and CBRC, and submit annual operational and financial results to the MoF.
In the past five years, COAM has rapidly diversified its business into insurance, securities, trust, finance leasing, etc. Although the diversification of business lines can smooth out the volatility in profit and leverage COAM’s extensive client base and network, execution risk also rises along with the fast expansion.
Concentration risk arises from COAM’s exposure to the Chinese property market, representing around 78% of its account and loan receivable portfolio at the end of 2012. However, one mitigating factor is most of its outstanding portfolio is either guaranteed by a third party or secured by assets with loan to value ratio less than 40%.
COAM is mainly funded by short-term borrowings while the maturity of its NPA portfolio could be relatively prolonged. Nevertheless, the large outstanding credit facilities as well as its good long-term relationship with various banks and financial institutions to some extent mitigate the risks arising from mismatched assets and liabilities.
COAM is one of four asset management companies owned by the MoF that were established with the mission of preserving state-owned assets, preventing and defusing financial risks and promoting reforms of state-owned entities. The four state-owned asset management companies are also the premium wholesalers for NPA under a policy that grants them privileges in transferring bulk NPAs and acquiring NPAs across different regions in China.
A positive rating action would stem from a similar change in the ratings of the sovereign and/or stronger explicit and implicit support from government. Material changes to its strategic importance or a dilution in the government shareholding to less than 51% could result in the entity no longer being classified as a dependent public sector entity and therefore no longer credit-linked to the sovereign rating, which may result in ratings downgrade.