Fitch Rates CDB Capital and Subsidiary at 'A+'; Outlook Stable
Fitch has also assigned a rating of 'A+' to the medium-term note programme and an expected rating of 'A+(EXP)' to senior unsecured notes issued under the programme by CDBI Treasure I Limited (CDBIT I), which are supported by a guarantee from CDBI and benefits from a keepwell and liquidity support deed and deed of equity purchase undertaking provided by CDBC. The final rating on senior unsecured notes under the programme is contingent upon the receipt of final documents conforming to the information already received.
CDBC is a highly integrated and wholly owned subsidiary of China Development Bank Corporation (CDB; A+/Stable). CDB is China's largest policy bank, providing funding to support infrastructure and pillar industries and Chinese corporations' "Go Global" strategy.
CDBC plays an important role in supporting companies that are strategically important to China's investment and development strategies through fund management, private equity and mezzanine investments. The company also provides asset management services and manages bilateral and multilateral funds to support China's economic and foreign affair initiatives.
CDBI, which is incorporated in Hong Kong, is CDBC's core overseas investment and financing platform.
CDBIT I is an offshore special purpose vehicle incorporated in the British Virgin Islands with limited liability and is a direct wholly owned subsidiary of CDBI.
KEY RATING DRIVERS
IDR - CDBC
CDBC's Long-Term IDR reflects our view of an extremely high probability of support from CDB due to its role as a core subsidiary to the group, its close linkage to the bank and policy role. Most of CDBC's new investments are coordinated with CDB and the bank's branches are highly involved in CDBC's investment decision-making process. CDBC is authorised to approve investment projects worth less than CNY2.5bn and projects exceeding this limit must be approved by CDB.
CDBC carries CDB's brand name and enjoys strong synergies with the bank. One-third of CDBC's investments are used to support urbanisation projects, a key focus for China's development strategy. CDBC also invests and manages 16 bilateral and multilateral funds for the Chinese government, including Silk Road Fund, which supports China's "One Belt One Road" strategy. CDB has strong oversight over CDBC's strategy and financial plans. All of CDBC's six board members are appointed by CDB, and CDBC is consolidated in CDB under the supervision of China Banking Regulatory Commission.
CDBC is relatively small compared with CDB; at end-2014 CDBC accounted for only 0.9% of CDB's total assets (based on CDB's latest available audited financial report) and contributed 6.5% to CDB's net profit for the year. By end-2015, CDB had injected CNY51bn of capital into CDBC since the company's inception to fund its growth and investment projects. We expect CDB to remain CDBC's sole shareholder and provide the company with capital support if needed.
CDB's Long-Term IDR is driven by support from the China sovereign and is equal to the sovereign rating. We expect sovereign support to be passed down to CDBC through CDB, if needed, based on CDBC's important policy role and strong linkage with CDB.
CDBC's Stable Outlook reflects our expectation that its policy role and strategic importance to and close operational linkage with CDB will not change significantly over the rating horizon. Thus, CDBC's Outlook is consistent with the Stable Outlook on CDB's ratings.
CDBC was established in 2009 with the approval of China's State Council and had total assets of CNY115bn and shareholder equity of CNY77bn at end-2015.
IDR - CDBI
CDBI's Long-Term IDR reflects our view of an extremely high probability that CDBI would receive support from CDBC and CDB, due to its role as a core subsidiary of CDBC. The company's business scope overlaps with CDBC's, including supporting new types of urbanisation projects, industry-specific investments, overseas investments and bilateral fund management. CDBI's operations, risk management system, business development, personnel and strategic goals are highly integrated with those of CDBC, and CDBC has strong control over CDBI's operating decisions and personnel appointment. CDBC has a history of providing capital injections and credit enhancement for CDBI, which also carries CDB's brand name and enjoys strong synergies with CDB's Hong Kong branch.
CDBI accounted for 19% of CDBC's total assets at end-2015 and 5% of total revenue for the year. It reported a net loss of HKD180m (including losses from discontinued operations of HKD72m), while CDBC reported a net profit of HKD4.3bn. CDBC injected capital of HKD4.8bn into CDBI between 2011 and 2016 to support CDBI's growth, including investment in several bilateral funds. We expect CDBC to remain CDBI's sole shareholder and to provide capital support if needed, given CDBI's role as core subsidiary to manage CDBC's overseas investments and its high level of integration into CDBC's operations.
The Stable Outlook reflects our expectation that CDBI's role as CDBC's sole overseas platform and close operational linkage with CDBC will not change significantly over the rating horizon. Thus, CDBI's Outlook is consistent with the Stable Outlook on CDBC's rating.
CDBI was established in 2011 and had total assets of HKD25bn and shareholder equity of HKD11bn at end-2015.
SENIOR DEBT - CDBIT I
The ratings on the medium-term note programme and senior notes issued under the programme by CDBIT I primarily reflect our assessment of an extremely high probability of support from CDBC to both CDBI and CDBIT I. A default by the issuer or CDBI would create enormous reputational risk for CDBC and its ultimate parent, CDB.
The notes issued under the programme constitute CDBI's direct, general and unsecured obligations and will rank pari passu with CDBI's other existing and future unsubordinated and unsecured obligations.
The keepwell and liquidity support deed and deed of equity purchase undertaking require CDBC to purchase or procure the equity interest held directly by CDBIT I, CDBI or any other offshore subsidiary if a triggering event occurs. A triggering event may include a financial ratio failure, liquidity notice failure, default or a shortfall of cash flow or liquidity to meet its payment obligations.
The deed of equity purchase undertaking serves as a contingent mechanism allowing CDBC to provide foreign-currency liquidity to CDBI in a timely manner. CDBC will need approval from CDB and the regulators to complete the equity interest purchase, including from the Ministry of Commerce, National Development and Reform Commission, State-owned Assets Supervision and Administration Commission and State Administration of Foreign Exchange of the People's Republic of China. We believe the approval process will be expedited for CDBC to support CDBI in a timely manner due to CDB's important role and significance to the government as China's largest policy bank.
Fitch believes there could be practical difficulties enforcing the keepwell and asset purchase deed, which is not as strong as a guarantee. Nevertheless, the keepwell and liquidity support deed and deed of equity purchase undertaking suggest a strong propensity for CDBC to support CDBI and bonds issued by CDBIT I, if required.
RATING SENSITIVITIES
IDRS - CDBC and CDBI
CDBC's rating may be downgraded if there are any signs of a decreasing probability of support from CDB, including significant change in ownership structure and effective control. Any change in CDBC's rating and CDBC's propensity to support CDBI will directly impact CDBI's rating, including significant change in ownership structure and effective control.
Any change in CDB's rating, which reflects shifts in the perceived willingness or ability of China's sovereign to support CDB and its subsidiaries in a full and timely manner, is likely to affect the ratings on CDBC and CDBI to the same magnitude.
SENIOR DEBT - CDBIT I
The rating on CDBIT I's guaranteed notes is directly correlated with significant changes in CDBC's and CDB's willingness or ability to support CDBI if required. The rating on the notes would also be affected by significant changes in the perceived willingness or ability of China's sovereign to support CDB and CDBC in a full and timely manner.
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