OREANDA-NEWS. S&P Global Ratings today affirmed its 'BB+' long-term corporate credit rating on the China-based car rental company CAR Inc. and the 'BB+' issue rating on its outstanding senior unsecured notes. The outlook on the long-term corporate credit rating is negative.

At the same time, we lowered our long-term Greater China regional scale rating on CAR and the notes to 'cnBBB' from 'cnBBB+'. We removed all ratings from CreditWatch, where they were placed with negative implications on April 20, 2016.

"We affirmed the ratings on CAR because we believe the company could maintain its credit profile after the recent changes in its shareholding structure and senior management," said S&P Global Ratings analyst Gloria Lu. "We currently do not expect dominant control and significant intervention from CAR's largest shareholder, UCAR Inc. Hence, we do not assess both companies' credit profile on a consolidated basis nor apply group status on CAR."

We expect CAR's major shareholders to keep a good balance of control in the board structure. After the changes in shareholding structure, UCAR and Legend Holdings Corp. are the two largest shareholders with equity interest of 29.2% and 23.5%, respectively; neither has majority control over the board and management.

CAR's connected-parties transactions, particularly the ones with UCAR, are subject to board approvals. At the same time, we believe that UCAR, the car-hailing company which leases a substantial number of its cars from CAR, is not aggressively absorbing benefits from CAR.

However, we anticipate that the cross-holding shareholding structure will evolve and address uncertainties in CAR's operation and profitability. If we see aggressive benefits transfer from CAR to UCAR, we believe CAR's credit profile will most likely deteriorate.

Currently, UCAR is an important customer to CAR because it contributes about 30% of CAR's rental revenue, which elevated concentration risk in CAR's operation. In our assessment, CAR's collaboration with UCAR can underpin CAR's operating efficiency by improving vehicle utilization, which could overcome customer diversity deterioration.

"We assess UCAR's credit profile to be much weaker than CAR's, mainly due to its weak market position, high competition in a niche market, limited diversity, and deficit profitability," Ms. Lu said.

If we see signals that UCAR and CAR will get further economic benefits from each other, such as an enhanced supply/customer relationship, we would consider combining the two companies' credit profiles and apply group status to each company. Furthermore, we believe the combined UCAR and CAR may have a weaker credit profile than that of CAR on a stand-alone basis.

The negative outlook on CAR reflects our view on heightened risks from its relationship with UCAR, and uncertainties in its business operation following the change in substantial shareholders and management. Such risks, including the cross-holding shareholding structure, concentration risk in rental leasing and UCAR's unprofitable position, may dent CAR's competitive position, long-term profitability, and debt leverage.

In our view, a weaker management and governance could trim the ratings. This could happen if we expect CAR's profitability and debt leverage to significantly deteriorate to feed UCAR's high-growth aspiration. We could lower the ratings if we believe UCAR exerts high control over CAR or we expect both companies to have closer economic benefits, so that the combined group may have a weaker credit profile, which caps CAR's credit profile.

We also could lower the rating if CAR's debt-to-EBITDA ratio exceeds 3x or the ratio of funds from operations to debt falls below 30% on a consistent basis. This could happen if the company makes material debt-funded acquisitions or the performance of its rental business deteriorates due to significantly eroding profitability.

The lack of business diversity, CAR's limited operating record, and potential influences from UCAR limit rating upside. However, we could revise the outlook on CAR to stable if we believe UCAR will have limited impact and influence on CAR and collaboration helps to underpin both companies' credit profile. At the same time, CAR executes its growth strategy in China, demonstrates a record of prudent management and board effectiveness, while maintaining its operating margin and financial strength.