News Column

Moody's assigns A3/P-2 ratings to China Huarong Asset Management

July 6, 2014



Moody's Investors Service, ("Moody's") has assigned first-time A3/P-2 long-term and short-term issuer ratings to China Huarong Asset Management Co., Ltd. (China Huarong).

Moody's has also assigned a Baa1 rating to the proposed bonds to be issued by Huarong Finance Co., Ltd.

The outlook on all ratings is stable.

RATINGS RATIONALE

"China Huarong's A3 rating incorporates its ba3 stand-alone baseline credit assessment (BCA) and a six-notch uplift based on very strong likelihood of support from the Chinese government (Aa3 stable) in a stress situation," says Sonny Hsu, a Moody's Vice President and Senior Analyst.

China'sMinistry of Finance is currently the largest shareholder in China Huarong with a 98.06% stake. The Ministry of Finance's ownership stake will likely be diluted by the company's plans to raise equity from large institutional investors in 2014, and obtain public listing in 2015.

Nevertheless, Moody's expects the government to retain majority ownership in the company following the latter's capital raising exercises. China Life Insurance Company (A1 stable), which is also majority-owned by the government, currently owns the remaining 1.94% in the company.

China Huarong has an important policy role as one of four asset management companies established by the Ministry of Finance in 1999. These four companies assisted the government with the removal of problem loans from China's four major commercial banks prior to their listings, and have restructured many state-owned and private enterprises.

Moody's expects China Huarong's policy importance to increase as China's economy rebalances, with slower economic growth and tighter credit conditions likely to lead to more distressed firms in need of restructuring.

"China Huarong's BCA recognizes the company's leading and entrenched position in China's distressed assets market and its extensive experience in dealing with distressed borrowers and projects. Moreover, as a government-related entity, the company has strong access to funds in the domestic market," says Hsu.

At the same time, China Huarong's BCA takes into account the impact of expected rapid growth on the company's risk management and asset quality, and pressure on its balance sheet leverage. The company has relatively high standalone balance sheet leverage in terms of its unconsolidated equity/asset ratio, taking into account its majority-controlled bank and financial leasing subsidiaries.

The BCA also takes into account the company's reliance on wholesale funding and its relatively concentrated credit exposure to the real estate sector.


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Source: EMBIN (Emerging Markets Business Information News)


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