04.09.2015, 13:23
Fitch Upgrades China Orient Asset Management to 'A'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has upgraded China Orient Asset Management Corporation's
(COAM) Long-Term Foreign- and Local- Currency Issuer Default Ratings
(IDRs) to 'A' from 'A-'. The Outlook is Stable. A full list of rating
actions can be found at the end of this commentary.
Fitch has also upgraded COAM's existing offshore US dollar senior unsecured notes to 'A'. The notes, issued by Century Master Investment Co. Ltd, Starway Assets Enterprises Inc., and Charming Light Investments Ltd. are unconditionally and irrevocably guaranteed by China Orient Asset Management (International) Holdings Ltd (COAMI), a wholly owned subsidiary of COAM. 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 US dollar notes.
KEY RATING DRIVERS
The upgrade is primarily driven by the re-assessment of COAM's strategic importance to the Chinese sovereign (A+/Stable). COAM is of greater importance to the state following the entity's strong asset growth over the past three years. This brings COAM's asset size closer to that of other Fitch-rated Chinese asset management corporations (AMCs), which are notched one level below the sovereign's rating. The upgrade is supported by improved capitalisation from retained earnings.
COAM's total assets rose 67% in the past three years. The fast growth in COAM's distressed asset portfolio in the past three years has increased execution risk and could add pressure on capital adequacy. Its fast-growing restructured assets portfolio has yet to weather through cycles and asset quality may deteriorate in the event of an economic downturn. However, Fitch believes COAM's industry experience and seasoned management partly mitigate these risks. The agency expects COAM's total assets and net profit to grow by around 15%-20% annually in the next two to three years.
COAM's ratings are credit-linked to those of the Chinese sovereign. This reflects COAM's state ownership, strong control by the state and strategic ties with the state, which result in a strong likelihood of extraordinary state support, if required. The agency has applied a top-down approach in its rating of COAM.
COAM is 100% owned by the Ministry of Finance. Although the agency understands that the Ministry of Finance is likely to dilute its shareholding in COAM in the near future, it will still maintain a majority controlling stake.
COAM is one of four big AMCs that the Chinese government established to mitigate financial risks, preserve state-owned assets, and promote the reform and development of the country's financial system. These AMCs therefore are strategically important to the Chinese government and are the premium wholesalers for non-performing assets (NPAs) in China.
COAM has no board of directors - major strategic decisions are made by the Ministry of Finance. Daily operations are managed by its president and seven executives appointed by the China Banking Regulatory Commission (CBRC), which oversees the asset management industry. COAM's management reports its operational and financial performance to the finance ministry and CBRC on a regular basis.
As a distressed asset manager, COAM's portfolio carries more inherent credit risk than a normal loan portfolio. Concentration risk arises from COAM's meaningful exposure to the Chinese property sector in its portfolio. However, the low loan-to-value ratio of its distressed loan and receivables portfolio partly neutralises the concentration risk.
COAM's relies on wholesale funding. This makes it more vulnerable to a rise in interest rates. Therefore, tight liquidity conditions in the domestic market may result in higher borrowing costs and may depress the company's profitability.
RATING SENSITIVITIES
Positive or negative rating action may result from a similar change in the sovereign ratings. Stronger explicit support from the government or improvement in COAM's performance and capitalisation may lead to a ratings upgrade.
Any significant dilution of COAM's core activities in the acquisition and management of NPAs may lead to a widening in the notching.
Significant changes to its strategic importance or a dilution of the state's shareholding to below 51% may result in COAM no longer being credit-linked to the sovereign rating.
The full list of rating actions is as follows:
COAM
Long-Term Foreign Currency IDR upgraded to 'A' from 'A-'; Outlook Stable
Long-Term Local Currency IDR upgraded to 'A' from 'A-'; Outlook Stable
USD2bn medium-term note programme upgraded to 'A' from 'A-'; Outlook Stable
Century Master Investment Co., Ltd
USD600m 4.75% senior unsecured notes due 2018 upgraded to 'A' from 'A-'
Starway Assets Enterprises Inc.
CNY2.5bn 4.1% senior unsecured notes due 2017 upgraded to 'A' from 'A-'
Charming Light Investments Ltd.
USD1.1bn 3.75% senior unsecured notes due 2019 upgraded to 'A' from 'A-'
USD400m 5% senior unsecured notes due 2024 upgraded to 'A' from 'A-'
Fitch has also upgraded COAM's existing offshore US dollar senior unsecured notes to 'A'. The notes, issued by Century Master Investment Co. Ltd, Starway Assets Enterprises Inc., and Charming Light Investments Ltd. are unconditionally and irrevocably guaranteed by China Orient Asset Management (International) Holdings Ltd (COAMI), a wholly owned subsidiary of COAM. 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 US dollar notes.
KEY RATING DRIVERS
The upgrade is primarily driven by the re-assessment of COAM's strategic importance to the Chinese sovereign (A+/Stable). COAM is of greater importance to the state following the entity's strong asset growth over the past three years. This brings COAM's asset size closer to that of other Fitch-rated Chinese asset management corporations (AMCs), which are notched one level below the sovereign's rating. The upgrade is supported by improved capitalisation from retained earnings.
COAM's total assets rose 67% in the past three years. The fast growth in COAM's distressed asset portfolio in the past three years has increased execution risk and could add pressure on capital adequacy. Its fast-growing restructured assets portfolio has yet to weather through cycles and asset quality may deteriorate in the event of an economic downturn. However, Fitch believes COAM's industry experience and seasoned management partly mitigate these risks. The agency expects COAM's total assets and net profit to grow by around 15%-20% annually in the next two to three years.
COAM's ratings are credit-linked to those of the Chinese sovereign. This reflects COAM's state ownership, strong control by the state and strategic ties with the state, which result in a strong likelihood of extraordinary state support, if required. The agency has applied a top-down approach in its rating of COAM.
COAM is 100% owned by the Ministry of Finance. Although the agency understands that the Ministry of Finance is likely to dilute its shareholding in COAM in the near future, it will still maintain a majority controlling stake.
COAM is one of four big AMCs that the Chinese government established to mitigate financial risks, preserve state-owned assets, and promote the reform and development of the country's financial system. These AMCs therefore are strategically important to the Chinese government and are the premium wholesalers for non-performing assets (NPAs) in China.
COAM has no board of directors - major strategic decisions are made by the Ministry of Finance. Daily operations are managed by its president and seven executives appointed by the China Banking Regulatory Commission (CBRC), which oversees the asset management industry. COAM's management reports its operational and financial performance to the finance ministry and CBRC on a regular basis.
As a distressed asset manager, COAM's portfolio carries more inherent credit risk than a normal loan portfolio. Concentration risk arises from COAM's meaningful exposure to the Chinese property sector in its portfolio. However, the low loan-to-value ratio of its distressed loan and receivables portfolio partly neutralises the concentration risk.
COAM's relies on wholesale funding. This makes it more vulnerable to a rise in interest rates. Therefore, tight liquidity conditions in the domestic market may result in higher borrowing costs and may depress the company's profitability.
RATING SENSITIVITIES
Positive or negative rating action may result from a similar change in the sovereign ratings. Stronger explicit support from the government or improvement in COAM's performance and capitalisation may lead to a ratings upgrade.
Any significant dilution of COAM's core activities in the acquisition and management of NPAs may lead to a widening in the notching.
Significant changes to its strategic importance or a dilution of the state's shareholding to below 51% may result in COAM no longer being credit-linked to the sovereign rating.
The full list of rating actions is as follows:
COAM
Long-Term Foreign Currency IDR upgraded to 'A' from 'A-'; Outlook Stable
Long-Term Local Currency IDR upgraded to 'A' from 'A-'; Outlook Stable
USD2bn medium-term note programme upgraded to 'A' from 'A-'; Outlook Stable
Century Master Investment Co., Ltd
USD600m 4.75% senior unsecured notes due 2018 upgraded to 'A' from 'A-'
Starway Assets Enterprises Inc.
CNY2.5bn 4.1% senior unsecured notes due 2017 upgraded to 'A' from 'A-'
Charming Light Investments Ltd.
USD1.1bn 3.75% senior unsecured notes due 2019 upgraded to 'A' from 'A-'
USD400m 5% senior unsecured notes due 2024 upgraded to 'A' from 'A-'
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