October 31, 2017 / 1:00 AM / a year ago

Fitch Rates Huarong's Notes Under MTN Programme 'A(EXP)'

(The following statement was released by the rating agency) HONG KONG, October 30 (Fitch) Fitch Ratings has assigned Huarong Finance 2017 Co., Ltd.'s proposed senior unsecured notes to be issued under its USD10 billion medium-term note (MTN) programme an expected rating of 'A(EXP)'. Fitch has also assigned the proposed US dollar perpetual securities issued under the MTN programme an 'A-(EXP)' expected rating. Huarong Finance 2017 is wholly owned by China Huarong International Holdings Limited, which is wholly owned by China Huarong Asset Management Co., Ltd. (Huarong, A/Stable). The final ratings on the proposed notes and securities are contingent upon the receipt of final documents conforming to information already received. KEY RATING DRIVERS Huarong's ratings are credit-linked to those of the Chinese sovereign (A+/Stable) and notched one level below. This reflects the company's state ownership and strong control by the authorities. Huarong's strategic ties with the state mean there is a high likelihood that the company would receive extraordinary support from the sovereign, if needed. The notes under the MTN programme are unconditionally and irrevocably guaranteed by Huarong International. The notes will be Huarong International's senior unsecured obligations and rank pari passu with all its other senior unsecured obligations. In place of a guarantee, Huarong has granted a keepwell deed and a deed of equity interest purchase, investment and liquidity support undertaking to ensure Huarong International has sufficient assets and liquidity to meet its obligations under the guarantee for the securities under the MTN programme. The notes are rated at the same level as Huarong's Issuer Default Rating (IDR) due to the strong link between Huarong and Huarong International and because the keepwell deed and deed of equity interest purchase, investment and liquidity support undertaking transfer the ultimate responsibility of payment to 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 Huarong to ensure Huarong International has sufficient funds to honour the debt obligations. The agency also believes Huarong intends to maintain its reputation and credit profile in the international offshore market and is unlikely to default on offshore obligations. In addition, a default by Huarong International could have significant negative repercussions on Huarong for any further offshore funding. The rating on proposed US dollar perpetual securities is notched down once from Huarong's 'A' IDR. Although the notes are unsubordinated, the one-notch difference reflects that, in a stress scenario, Huarong may decide to prioritise senior unsecured debt when extraordinary support is needed. The securities will be direct, unsubordinated and unconditional obligations of Huarong Finance 2017 and Huarong International, despite their perpetual nature, and will rank pari passu with Huarong International's other unsecured unsubordinated obligations. Fitch deems the securities' effective maturity as finite and linked to the step-up of the coupon on the first-call date. Dividend stoppers from all three entities have reduced the opportunity for optional coupon deferral. Fitch does not expect to accord equity credit to the proposed securities in its evaluation of Huarong's capital structure and leverage, as the instrument ranks pari passu with Huarong's senior unsecured obligations. Huarong was established in 1999 and is one of four big asset-management companies approved and set up by the State Council to safeguard the country's economic and financial stability. RATING SENSITIVITIES Any rating action on Huarong's IDR would result in similar action on the ratings of the programme and rated notes. Positive or negative rating action on Huarong's IDR could result from similar action on the sovereign. Stronger explicit support could lead to the ratings being aligned with those of the sovereign. Any significant dilution of Huarong's core activities in the acquisition and management of non-performing assets could lead to wider notching. Significant changes to Huarong's strategic importance or a dilution of the state's shareholding in the entity, resulting in a loss of control, could result in a widening of the notching down from the sponsor's rating, as could a change in the approach applied, resulting in Huarong no longer being classified as a public-sector entity and, therefore, no longer being credit-linked to the sovereign rating. Contact: Primary Analyst Samuel Kwok Associate Director +852 2263 9961 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Terry Gao Senior Director +852 2263 9972 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 Date of Relevant Rating Committee: 28 June 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis- Effective from 26 February 2016 to 27 April 2017 (pub. 29 Feb 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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